Gangs of New York: Organized Crime as the Link between Inequality and Corruption

Abstract

Empirical evidence on the causes and effects of inequality suggests the existence of a vicious circle of mutually reinforcing inequality, corruption, and weak institutions. Despite the broad empirical evidence, there are only a few formal theoretical models on these dynamics. Relying on a game-theoretic approach, we show how inequality and corruption/institutional quality are interconnected via a crime channel. According to our model, collusion between law enforcement agencies and criminal organizations is more likely in societies characterized by high inequality and/or weak security forces. If those actors collude and, thus, eliminate public security, the citizens are exploited to the greatest possible extent and inequality is perpetuated. At the same time, those societies feature high levels of corruption and criminal activity. Surprisingly, our results allow for the interpretation that policies of lowering inequality or increasing the effectiveness of local police forces may be ineffective countermeasures. We instead suggest that those societies should intervene with non-local law enforcement agencies in order to (re-)establish the rule of law. That measure had been successfully utilized in the Colombian "War on Drugs" and, to a lesser extent, in order to contain the influence of the American Mafia in the 1960th.