POL S 371 - Global Crime & Corruption

What is Corruption?

Definition: the abuse of public office for private gain

• Four types of actors:

  • Public Officials (politicians) (often elected, or gain power through force/inheritance)

  • Government Bureaucrats (some appointed/others non-partisan)

  • Business (businessperson, firm, sector, industry; also “organized crime groups”)

  • Everyday citizens (you & me, voters, social groups, civil society)

• Defining Corruption involves 3 separate but sometimes overlapping standards

  • standard of public interest (does it help or hurt the public interest?)

  • standard of public opinion (do citizens support or oppose?)

  • standard of the law (does the law say it is legal or illegal?)

    • All three standards not always met with a “corrupt” act or even a corruption act that is also against the law

What is the Chain of Delegation?

• Four types of actors in the public sector:

  • Political leader/politician (president): Lp

  • Political leader/politician (head of agency): Lh

  • Bureaucratic manager (head of office): Bm

  • Individual Bureaucrat (front line officer worker): Bi

• In public sector, a series of “principals” and “agents”

  

• “Abuse of public office”: One of these principles and/or one of these agents breaks a rule governing how agencies operate specifically, or laws more generally.

• Cheating in the delegation chain

  • Principals select agents, but agents can cheat 

  • cheating=shirking (neglection or avoiding the responsibilities for which someone has been hired 

What is Bribery?

explicit exchange of money, gifts in kind, or favors for rule breaking or as payment for benefits that should legally be costless or be allocated on terms other than willingness to pay

Nepotism

hiring a family member or one with close social ties, rather than a more qualified but unrelated applicant

Cronyism

preferring members of one’s group (racial/ethnic/class/party) over members of other groups in job-related decisions

Public service fraud

any activity that undermines the legal requirements of public service delivery even if no bribes are paid

Kleptocracy

an autocratic state that is managed to maximize the personal wealth of the top leaders

Influence peddling

using one’s power of decision in government to extract bribes or favors from interested parties

Conflicts of interest

• having a personal stake in the effects of the policies one decides.

Causes and Consequences of Corruption

Rational Choice Theory

• People make decisions based on maximizing benefits and minimize losses  to obtain the greatest benefits from the choices or resources available( optimize) 

• People not driven by psychological conditions or simply following social cultural norms 

• Rather in their decisions and behavior, they are self interested and rational in the pursuits of their self interest 

• This can apply to crime and corruption if responding to incentives or maximizing gains while minimizing losses actually means breaking the law or abusing public office 

What constrains information and affects our ability to make rational decisions?

Psychology and Culture:

• People interpret the world differently due to personal experiences, mental shortcuts, and emotional reactions.

• These are fast ways our brains simplify decision-making, sometimes at the cost of logic or accuracy.

• People have different attitudes toward risk. One person may love gambling (risk-seeking), while another avoids it (risk-averse), even with the same odds and rewards.

• Behavioral turn in economics and political psychology 

Psychological Part of Global Crime and Corruption

Think automatically: people make most judgements and most choices =, automatically, not deliberately, so not always taking the time to perfectly calculate expected utility and rank outcomes 

• intrinsic= internal to the brain rewards/punishments (good/bad feelings) warm glow

• Extrinsic= external to the brain rewards/punishments (like salary, bribe, getting caught and punished) 

Think socially: how people act and think often depends on what others around them do and think, or how their actions might affect other around them 

• Norms of reciprocity- certain actions may be context specific, “reciprocal” and therefore reflexive

• Relates to concept of trust per Rose-Ackerman: Trust: 1) generalized trust  2) interpersonal trust 3) Institutional trust

Think with mental mode:

• Culture: a collection of informal institutions

Why people join groups like the Nazis?

• Lack knowledge of the Third Reich or were intimidated/coerced 

• People thinking with mental models and conforming to others 

• Appeals to nationalism

The Rise of the Third Reich

• Weimar Republic was an emerging democracy after WW1 

  • Very unstable democracy, Nazis able to take power with 33% of votes 

• Nazi Party took power in 1933, based on facism 

• Hiter had some popular support due to economic challenges (reparation payments) and social/cultural challenges (extreme polarization) 

• Market analogy:

  • Supply: political order, good feelings about German nationalism, political violence 

  • Demand: political, social, economic stability, mind-altering substances 

• Nazis broke the law before they took power, illegal conduct of war, genocide/murder

How can we use psychological models of decision-making to understand the behavior of both Hitler and his followers under the Third Reich?

• Decisions = {Extrinsic, Intrinsic (Motives, State of Mind)}

• Hitler 

  • Motives: War and violence?, survival?, evil? 

  • State of Mind: personality disorder, drug use, suicide  

  • Thinking rational → very risky, some military decisions maximized utility, others did not 

  • Thinking automatically → often calculates utility of actions, but also quick/rash decisions 

  • Thinking socially → told what he wants to hear instead of truth, doesn’t know who to trust 

  • Thinking with mental models → cultural framework to appeal to people, culture of extreme drug use 

• Followers 

  • Motives: War and violence?, survival?, evil? 

  • State of mind: pervitin, mass drug use. Hitler’s appeal as a drug 

  • Thinking rationally → complicity for survival or erosion of norms 

  • Thinking automatically → voting without consequences (against Weiman, communists) 

  • Thinking socially → “going along” with Nazi parties, incentives to report on people 

  • Thinking with mental models → appealing to nationalism, fears, Germany turned against Nazi mental model after Hitler died

What is Madison’s Dilemma and Paradox of Power

• Madison’s Dilemma: Liberty and self-interest can drive economic growth, but unchecked self-interest leads to greed and harms society. Citizens and businesses influence leaders and bureaucrats for personal gain.

• Paradox of Power: While people need a strong authority to govern them, those in power are also self-interested, meaning they might abuse that power.

• This creates tension between building a limited government that prevents abuse and an effective government that can govern well.

How to solve Madison’s Dilemma?

• Rethink campaign financing? 

• Education and participation → citizen watchdogs 

• Government institutions arrangements 

• Business and citizens are often the ones demanding corruption 

Supply & Demand Equations

• How to shift supply in an effort to reduce bribes (“reform”)?

  • S= Wage (w) + Probability of Detection and Punishment (p) * Punishment (x)

• How to shift demand in an effort to reduce bribes (“reform”)?

  • D= Profits (g) + Taxes (t) + Regulations

How does the black market differ from the market for bent rules, and who participates in it?

• Beyond Bent Rules: The Black Market

  • Black Market ≠ Market for Bent Rules

  • Not about bending legal systems—purely illegal goods/services.

  • No legal analog (e.g., human trafficking, weapons, organ trade).

  • Criminal groups create demand & supply, often operating entirely outside state control.

  • State and non-state actors both complicit

What does Illicit mean?

illegal or breaks rules/norms/customs

Politicians & Bureaucrats — Trump(not just trump) — 2 problems inherent in the delegation chain for managing bureaucrats 

• Hiring 

  • Pay and recruitment (per rose ackerman) 

  • Intrinsic desires vs extrinsic incentives 

  • For agents: can lie or misrepresent themselves or their skills 

  • For principals: could purposefully select on bad dimensions: 

  • cronyism/nepotism/clientelism 

  • Potential conflicts of interest for principal and agents 

  • Weberian bureaucracy → professional and well-trained, whether agents are good or bad, they require training for their jobs after they are hired (time/investment to teach and learn)  \

• Oversight and monitoring “carrots and sticks per Rose-Ackerman 

  • After hiring them, principals have to watch agents to observe performance 

  • Information about whether agents are doing their jobs (process), whether they are cheating or not, and performance of outcomes → answers whether they might be shirking 

  • Sanctioning, “Carrots and Sticks” per Rose-Ackerman 

  • Principals must reward good performance and punish bad performance (shirking) 

  • This requires threat of detection plus actual punishment 

  • But at the top, must be accountability linkages inside and outside of bureaucracies, so Principals (Lp) do their job

  • Question of who sanctions and where accountabilities lies— could be principals, but if principals are shirking, who monitors the monitors? 

Politicians & Bureaucrats — Trump(not just trump) — Policies most likely to generate accountability and reform of these organizations to reduce their illicit activity

• According to Rose-Ackerman, a framework to answer by diagnosing the problem and finding solutions:

  • Separation of roles so bureaucrats understand what they do as public employees vs. private individuals 

  • Clear and robust underlying legal structure that defines and informs bureaucrats about illegal and illicit behavior (rule of law) 

  • Audit and oversight of agents that captures and punishes poor performance 

  • Accountability at the top among political leaders that spark good management from the top all the way down 

Politicians & Bureaucrats — Trump(not just trump) —- Accountability beyond the ballot box

• State and business can balance each other depending on their relative bargaining power to restrain corruption

• But! Berong that or regardless of it, other institutional dimensions to consider that may generate accountability for public agencies/bureaucracy (Rose-Ackerman riffing on Madisons dilemma): 

  • Accountable implementation and statutes 

    • An executive branch usually “implements laws” passed and budgeted by legislature (think Madison; separation of powers between president and Congress; but applies to state and local level too)

    • Executive branch can have broad power to pursue policy making, regulatory environment and “how to spend the money” on their own 

    • Executive can sometimes enact statutes: the precise standards for how government agencies operate, procedural requirements, regulations, etc. all withing executive agencies 

    • Statutes can carry the power equivalent to law in many systems 

    • This makes the executive branch not only critical to government functioning =, but also very powerful 

      • Prediction: the more executive processes are transparent, overseen by the legislature, constrained by judiciary– the more likely public agencies managed well and reduce corruption

Politicians & Bureaucrats — Trump(not just trump) — Federalism and Decentralization 

• Regardless of separation of powers at the federal level between executive and legislature (power-sharing); a way to power-divide by allowing local government units (states, provinces, districts) policy making power and implementation (think Jefferson/Madison vs Hamilton)

• Decentralization/devolution: moves functions of national government to local level → staffing of agencies from local dynamics, taxing and spending abilities, responsibilities over service provision

• In developing countries, decentralization pushed in the 1980-90s to reduce centralized power of national executive, allowing localities more power and influence over policy making → giving them greater “Voice” 

• Also allow people option of exit → if business citizens don't like local conditions, they can vote with their “feet”  and move to another location( think amazon) 

  • Prediction: Voice and exit should improve all locations overall through competition, reducing total levels of corruption or government waste (market for good government) 

Politicians & Bureaucrats — Trump(not just trump) — Independent judicial institutions

• Beyond separation of powers between executive and legislative branches of government, judiciary plays and important role 

• Executive and legislature frequently pass or enact laws that may violate other laws or constitution, need judicial check on law making  and interpretation of laws 

• Additionally, need judicial oversight of individual legislators and members of the executive branch 

• This requires courts and judges at local and national level, as well as prosecutors (variety of appointment procedures depending on country, sometimes appointed by executive). 

• Can also have anti-corruption agencies” – independent bodies that investigate government corruption (and assist prosecutors and courts) (NIgeria and Kenya)

  • PredictionL if these institutions are independent and have capacity they can reduce corruption in any articular agency or location (and society more generally) 

Politicians & Bureaucrats — Trump(not just trump) — Openness and Accountability

• Agencies have to be “open” and “accountable”: other government actors and agents (judge, prosecutor) have to have information on public agencies and bureaucratic behavior 

• With information much more likely to hold people accountable 

  • Auditing and probability of detection important for outside actors too to gain information 

  • And not just other government actors but also citizens 

  • Helps to ensure that information not “jammed” or weaponized 

• If citizens have better information through media, public opinion, and grassroots organizing can help to increase accountability 

• Ability of individuals to make and report complaints, “I Paid a Bribe” app/website 

  • Prediction: where agencies are more open and accountable, that agency less likely to have corruption or poor performance and potentially less corruption overall in society 

Politicians & Bureaucrats — Trump(not just trump) — Improving Public Agencies from the inside or outside? 

How do you prevent criminal behavior by political actors, especially Lp? Can it come from within those institutions (even from agents), or mist always come from outside

Mafia

• Definition: a specific economic enterprise, an industry which produces, promotes, and sells private protection (Gambetta) 

Mafia - Protection

• Protection: 

  • When one party does not trust the other to comply with the rules or an agreement (cooperate), protection becomes desirable (so both sides have guarantees that the other will cooperate and not defect, like contracting)

    • The main market for mafia services is to be found in unstable transactions in which trust is scarce and fragile (Gambetta) 

    • “Peppe” can be a single mafiosi, mafia group, or group of mafia organizations working together 

    • Why is protection “private”? — absence of the state to provide it for the public as a public good or provides at a higher cost in public taxes than mafia can charge privately 

Mafias — Sicilian Mafia — Origins

In 19th-century Italy, the end of feudalism led to significant economic, political, and social transformations:

• Economically, peasants gained more autonomy, enabling them to profit from their own labor, while merchants and a middle class began to grow.
  
  

• Politically, the unification of Italy in the 1860s expanded rights but also triggered conflict and instability.

• Socially, new class tensions emerged between landowners, laborers, and peasants, often erupting in violence and banditry.
  
  

In Sicily, these changes occurred in a weak state environment with insecure property rights and limited law enforcement. As agricultural production and commerce increased, so did fear of theft and fraud across all stages of the supply chain—from farm to market.

Three key conditions contributed to the rise of the mafia:

1. Economic conflict over land and resource control.
   
   

2. Mobile wealth and frequent transactions, especially in markets.
   
   

3. Political conflict due to institutional reforms by the new Italian state (1869–1890).

What is Game Theory?

• Actors are rational and want to maximize expected utility 

• Have 2 strategies = cooperate or deflect 

Mafias — Sicilian Mafia — Structure?

• Mafia sells private protection on a private basis, so price varies, can be cheap or expensive depending on: 

  • 1. Value of what has to be protected

  • 2. The likelihood that someone wants to cheat 

  • 3. Competition for supply protection→ affect price and quantity of protection 

Mafias — Sicilian Mafia — Property Rights (also define what property rights are)

• Mafias thrive where “property rights are insecure 

  • Property rights: the rule that determines how economics resources are distributed (who gets to own what and how?) 

    • Rules regarding land, banking, markets, trade, etc. and contracts to enforce those rules 

    • Secure property rights means every actor knows the rules, some will benefit, some will lose-but this helps the social good 

    • Insecure property rights means that people don't know the rules, the rules are shifting or uncertain actors don't obey the rules, survival of the fittest-this hurts the social good 

Political Economy of Mafias

• Main market for mafia services is to be found in unstable transactions in which trust is scarce and fragile → no legitimate enforcement agent providing protection because the exchange is illegal or the state does not provide protection or provides it at too high a tax

How do mafias work?

• Oathing rituals, use of symbols to signal reputation 

• Omerta: a code of silence about criminal activity and a refusal to give evidence to authorities.

What does a Mafia need?

• Mafia needs: 

  • Credible reputation 

  • Intelligence network 

  • Violence (real or threat) 

  • Mafiosi must be stronger than parties she protects 

  • Tougher than competitors 

How does the mafia help overcome collective action and coordination problems in the world?

• Mafias absorb the potential risk of defection by providing protection agree to pay cost is one side cheats(enforcement) 

• Mafias often negotiate (parlay) action between various actors (coordination) 

• Deliver votes to certain politicians, voter mobilization coordinated around candidates or parties(coordination)

Mafias — Sicilian Mafia — Illicit Behavior

• In market for protection, Mafia has: 

  • Information about buyer and seller (can be legal or illegal exchange) 

  • Guarantees the sale via private protection (illicit even if the commodity itself is legal)

  • But yes protection is now a commodity being sold (market for protection)

Mafia’s: the Market 

• Market for protection: what are mafia’s supplying? Property rights, justice, laws, guarantees, etc. → protection for illegal or legal sales, but “protection by private actor is illegal → the market for protection is what distinguishes mafias from other types of OCGS

• Market for illegal goods: mafia can provide protection and dispute mechanisms between the suppliers and demanders of illegal goods and/or buy/sell illegal/ black market goods themselves. 

• Market for bent rules:  mafias bribe public officials or seek government contracts to avoid prosecution and gain access 

• Market for legal goods: mafia can supply or demand any number of legal goods to help their criminal behavior, and/or take illegal profits and launder then into legal supply/demand of legitimate business like other OCGs

What does a Mafia do?

• All sides need guarantees of mutual distrust→ mafia can sell information but also guarantee purchase (reducing transaction costs in market analogy) 

• Mafia can gain monopoly over territory and help players avoid paying real tax to state or extortionary briber to the state( the tax to a mafia is better/cheaper than a tax to the state) 

• Violence, coercion, and extortion employed to supply protection, but mafias use violence a means to that end not an end in itself 

• Protection involves control of territory similar to control of market 

• Protects others, and himself/group against cheats and competitors, fraudulent suppliers

• Sometimes protect both buyer and seller, or just one at expense of sucker→ mafia wants to gain reputation for trust, but continues to thrive where distrust remains between buyers and sellers 

Positive and negative externalities for Mafia Protections

• But this protection has positive and negative externalities per market analogy, and different folks gain/suffer from those externalities depending on variety of factors 

  • Often protection provided to criminals/criminal transactions, causing violence to go up 

  • But protection can also redound to free riders in mafia controlled area even for businesses that have not paid (like a public good)  

Pirates — Origins

• Anarchy: no political authority who has a monopoly on the legitimate use of violence

• Invisible Hook: pirates have incentives to cooperate to achieve economic outcomes and self-interest 

  • Assumes self-interest, rational, and respond to incentives   

• Pirate: group defined by captain and crew on a ship 

• Pirates were previous crew on merchant or navy ships 

Pirates — Game of Chicken

• Game of Chicken: 

  • Equilibrium: one person is the chicken and one person wins 

  • Who blinks first?

    • Anti coordination game

  • Signaling: Pirates use the Jolly Roger to signal to ships that they have an aggressive strategy, without actually using violence  

    • Other ships know pirates are the type to defect, so they will cooperate 

• Brinkmanship: trying to achieve the upper hand by pushing events to the brink 

Pirates — Political Economy

• Market: 

  • Don’t supply or sell anything so no market. Harm society by stealing pre-existing wealth 

• Very egalitarian life 

• Solving Madison’s Dilemma: 

  • Collective decision making: equal split of loot, elections

  • Seperation of power: captain has some roles, quartermaster has others 

• Principal-agent dynamics: 

  • Pirates are both the principals and the agents, so their interests are aligned

    • Different than merchant ships where the owners didn’t sail, so needed authoritarian captains 

• Pirate Codes: laws and regulations that all pirates understood, prevented free-riding through social-insurance scheme 

  • Governance: mechanisms or institutions that provide social rules and order 

• Pirates have high discount rates (present benefits are more valuable than future ones) 

Pirates — Policies most likely to generate accountability and reform of these organizations to reduce their illicit activity

• Accountability comes from within 

  • Pirates can overthrow their leaders 

• Reform Pirates 

  • Governments got better at catching and punishing pirates 

Define Gangs

• Gangs: illicit organizations whose primary purpose is for members to commit conventional crimes 

• Provide illicit governance 

  • Establishing property rights, ensure illegal markets are efficient

  • Criminal codes and practices to regulate criminal behavior   

Gangs — Mexican Gangs

• Protection taxes in prison to regulate street gangs 

• Enforce deals, provide property rights, adjudicate disputes 

• Mexican Mafia controlled Surenos 

• Governance

  • Written and unwritten codes 

  • Vote as a group but not hierarchy, acts as cooperative 

    • No direct chain of delegation within gangs 

  • Control entry, limit free-riding 

• Signaling: scaring others, advertise and communicate (tattoos)

• Gang members have low discount rates → recidivism, end up back in prison 

Gangs — Mexican Gangs — Illicit Behavior

• Petty crimes 

• Extortion 

• Violence 

Gangs — Mexican Gangs — Policies most likely to generate accountability and reform of these organizations to reduce their illicit activity

• Accountability from law enforcement

  • Runs prisons but can’t control gangs 

• Accountability from other race gangs 

  • May go to war with each other but mostly want to keep peace 

• Reform 

  • Reduce overcrowding in prisons, hire more police, make prisons less geographically centralized 

Define Terrorism

• Terrorism: use of violence to create terror/fear to achieve a political, religious, or ideological aim

  • Consists of:

    • Done by an illegal group or organization that isn't part of a government

    • Actual violence + threats of violence

    • Designed to have far-reaching psychological repercussions in society, can target civilians and the state

    • Group can be highly centralized with a strong chain of command, or more of a cell or network structure

    • Can be limited to within a country, or dispersed across countries

Terrorism — ISIS — Origins

• Primarily based in Iraq & Syria

• Arise after overthrow of Saddam Hussein & Baath Party in Iraq and civil war in Syria (remnants of both prior regimes join ISIS)

• Declare a “Caliphate” and become known to world in 2014 → Abu Bakr al-Baghdadi declares himself caliph (but had organized as off-shoot of al-Qaeda before that)

• Today:

  • ISIS, which called itself a caliphate, started to decline in Iraq during Trump’s presidency but wasn’t completely destroyed

  • Its leader, known as the caliph, Abu Bakr al-Baghdadi, was killed in 2019

  • After his death, ISIS lost control of the territory it had claimed

  • Some smaller ISIS branches still exist in places like Afghanistan and Libya

  • There are also individuals inspired by ISIS who act alone, called “lone wolves”

Terrorism — ISIS — Illicit behavior

• Pursue many criminal activities to support their actions: terrorism, but also theft and black market goods

  • Islamic → Prophetic methodology

  • State → Territory

Terrorism — ISIS — Structure

• ISIS acts like a “hermit kingdom” — isolated, extreme, and closed off from the world.

• It is a state that rejects peace and seeks genocide.

• It takes over land during times of chaos (anarchy), then tries to build its own version of a state — setting up some laws, collecting taxes, and offering basic services. But these efforts are very limited, and it fails to provide full social welfare like proper healthcare or infrastructure.

• ISIS’s strict religious beliefs stop it from adapting or changing, even if changing would help it survive. It believes it must follow religious prophecy no matter what.

• The group sees itself as a central player in the end of the world, preparing for the arrival of the Mahdi — a messianic figure who, in their view, will lead Muslims to victory in a final battle.

• Their interpretation of Islam shapes how they rule and why they provoke the West. They believe if Western armies invade Syria, it will start the events leading to Judgment Day.

• The idea of a final apocalyptic battle is deeply meaningful to ISIS members — it gives them purpose and satisfies a powerful psychological need for meaning and sacrifice.

Define Cults

1. Mankind's, many characteristics, no single definition:

• Charismatic leadership with link to divine, group of followers

• Belief system usually directed at a single personality or goal

1. Opposed to dominant culture and belief systems of others, typically “rebelling” against dominant religion

2. Can mix elements of dominant religions with interpretation of that religious that deviate from how other practice it

3. Can also make up unique beliefs/ideas de novo

4. Often outlawed or fought by the state & also rely of illicit activities to support group aims (lost of criminal activity within the cult)

5. Often become policy problems forcing the state to intervene → cults are rebelling against political order and therefore creating pockets of anarchy that the cult fills

Cults — Who joins?

• Across many cults in many settings, no clear social, political, racial, ideological, or class/economic “predictors” of who joins and why

Cults — Why join?

• Hard to characterize and depends on cult, but have in common, fulfilling  some “unmet” need (physical, social, psychological, spiritual) whether real or imagined

• Adults (men) vs. children (and women); exploitation vs. willingly; bard to physically and psychologically leave

Doomsday cults: apocalypse and “millenarian”, prophesize end of the world

1. Have existed all over the world, in rich and poor countries, throughout time

2. Heaven’s Gate & Marshall Applewhite

3. Long vs. short time horizons? → can depend on prophecy and what leader says (ISIS vs. Quietist Salafism)

4. Typically, such cults either commit mass suicide (People’s Temple and Jim Jones in Guyana), or are destroyed by the state in “baptism of fire” (Branch Davidians & FBI raid in Waco, although may have been mass suicide), or morph/become “legitimate” (eg. legal) of the dominant culture/religion

What are Considerations for policy

• Markets

• Weak Government/Anarchy

• Governance and Social Orders

• Criminal and Corrupt Politicians & Bureaucrats

• Transnational Dynamics

• Political Institutions in Democracy and Dictatorships

• Crime and corruption exist because it benefits people 

• No solutions only trade offs 

What Policy Questions?

• Compared to what?

• At what cost? 

• What evidence do you have? 

Policy for Game theory

• Game theory: cooperate to move new equilibrium 

Domestic Reform

• Skarbeck: forego government to provide adequate governance, instead rely on informal institutions to provide order to social world 

  • Governments often fail Madison’s Dilemma 

  • While extralegal governance often involves criminal enterprises, these groups maintain social order for their members

• Rose-Ackerman: a strong and powerful “leader” who can force cooperation and afford losses (top-down solution)

  • Strong leadership can offer assurances

    • Dictators can pursue anti corruption for economic gains 

    • Have to believe in their interests to change 

  • In democracies, politicians and voters can find corruption in their interests or can promise reform 

• Rose-Ackerman: “bottom-up” contractual model of consensus. People work together collectively for reform 

  • Sparks ignite changes on information and pay-offs  

Condorcet’s Paradox

• Humans have a hard time making and arriving at decisions collectively. Trouble “aggregating preferences” and turning individual inputs into group utility 

  • While individuals may be able to say what choice would maximize their individual utility, there is no easy or obvious way for the group to collectively maximize its utility

• Can’t ask for consensus. Different rules will lead to different outcomes for the same preferences.

Policy for Supply & Demand

• Policy response: Demand 

  • Decriminalization (elimination of penalties)/legalization(making it legal) vs tougher sentencing vs harm reduction

    • Reduce if people want to buy the good, decrease taste

  •  Oregon versus Portugal 

    • Oregon was trying to solve a problem they did not have 

• Policy Response: Supply 

  • legalization/tougher sentencing for sellers 

  • Stopping supply though law enforcement 

• Interventions are more difficult as buyers and sellers cross borders 

  • Illicit organizations exploit international boundaries

  • Pockets of anarchy allow criminal organizations to thrive 

Policy dilemmas

• Economic: Markets are not static   

• Political: Democracy: dictator can cause madison’s dilemma, but for democracy, do you trust citizens 

• Social: Condorcet’s paradox hard to have a rational policy response that reflects true preferences 

• International: more players makes cooperation harder 

Mexican Cartels — Markets

• Drugs, violence, extortion are all illegal in the production of the illegal trade in drugs

• But government and bent rules intimately related: local and national political leaders benefit, bribery, votes; the government in Mexico implicated in numerous corrupt and criminal actions

• Cartels often engaged in legal activity (limes, avocadoes, mining, trucking, manufacturing)

• Results of these markets?

  • Americans consume drugs, but also law enforcement problems at home and “spillover” from Mexico

  • For Mexico: criminality, violence, numerous other costs (negative externalities) imposed on Mexican society not asking to be any part of it, or involved in ancillary ways (extortion, rackets, “lime and avocado” business), rise of “vigilante” justice strengthen rival groups, “iron river” gun trade from US to Mexico 9

• Like with other markets, markets not static – -many things cause aspects to change, but also matters for externalitiesMarkets: Supply, Cartels overcome various dilemma in how market is organized

  • How do buyers and sellers “find” each other?

    • Supply from Mexico (and Colombia), demand in the US, members of carters trade with US outposts on US side of border

  • What do they trade, how much do they trade, and for what price?

    • Drugs (pot, heroin, cocaine, meth), various types at various prices, better at supplying some and not others

  • What happens when S > D, or D > S?

    • Supply and demand are often disrupted (law enforcement, rival cartels), so equilibrium hard to begin with, but demand is fairly inelastic overally; 1990s supply disruption (interdiction) with

    • Colombia moves transportation of cocaine to Mexico; demand for opium and weed go down, cocaine goes up, meth production moves to Mexico in 2000s because of US law enforcement at home

      • How do buyers trust they are getting the “real” good and how do sellers trust they are getting the “real” money?

        • quality of product tested all along route, but much harder to guarantee, payment much easier to guarantee (cash only, in kind trade)

Market: Bent Rules, Black Markets, Legal Markets — Mexican Cartels

• Drugs, violence, extortion are all illegal in the production of the illegal trade in drugs

• But government and bent rules intimately related: local and national political leaders benefit, bribery, votes; the government in Mexico implicated in numerous corrupt and criminal actions

• Cartels often engaged in legal activity (limes, avocadoes, mining, trucking, manufacturing)

• Results of these markets?

  • Americans consume drugs, but also law enforcement problems at home and “spillover” from Mexico

  • For Mexico: criminality, violence, numerous other costs (negative externalities) imposed on Mexican society not asking to be any part of it, or involved in ancillary ways (extortion, rackets, “lime and avocado” business), rise of “vigilante” justice strengthen rival groups, “iron river” gun trade from US to Mexico 9

• Like with other markets, markets not static – -many things cause aspects to change, but also matters for externalities

Mexican Cartels — Origins

• Nazario: born in 1970 in Guanajuatillo, Michoacán.

• Already OCG in Michoacán in 1970s

• Nazario goes to US in late 1980s and becomes involved in the US side of operations

•  Serves time in prison, comes back to Michoacán in 2004 when there is power vacuum to lead the entire organization, call themselves “La Familia Michoacana,” eventually “Knights Templar” (he was fan of The Godfather)

• 2006: nightclub beheadings announce their arrival; Sign left at scene: “La Familia doesn’t kill for money, it doesn’t kill women, it doesn’t kill innocent people—only those who deserve to die. Everyone should know: this is divine justice.”

• Why Nazario? 1990s-2000s, he had played an important role on Texas/US side as rise in cocaine trade moving from Colombia through Mexico

• This created: need for protection in transportation, cartels become like mafias trying to control own turf, market share → shapes incentives for cartels to compete, rather than collude (which means increase in violence)

• Cartels become more violent; La Familia known for beheadings, but also for providing protection for local residents and “administering justice,” first against Zetas, declare “Holy War” (sounds like ISIS!)

• Zetas were paramilitary wing of Gulf Cartel – originally working with La Familia against Sinaloans, but then La Familia turns again them because they are not from Michoacán and causing too much havoc

• La Familia wants to control the territory of Michoacán, but this means more than just territory – all means of production, administration, government, population, etc.

  • first considered by many residents as folk heroes: not only took on Zetas, but provided local public services, “governance” in the absence of strong government, jobs, social bandits, “something to believe in”

Mexican Cartels — What are the Sources of Crime & Corruption

• Mexico is a state-capture → not a failed state

How are the Mexican Cartels like Pirates?

• They had their own constitution → they had an understanding of what their codes were

• They planned a massive game of chicken

How are the Mexican Cartels like Cults?

• Divine Justice & Saints

  • Nazario Moreno (aka El Más Loco) built a cult of personality where he was literally worshipped as “Saint Nazario.”

  • Followers prayed to him, knelt before shrines, and saw him as a holy warrior.

  • Justified violence as moral righteousness — “Old Testament justice.”

• Catholic + Evangelical Fusion

• Grew up Catholic (Michoacán = very religious).

• Selective theology to justify murder and meth dealing.

• Knights Templar / Rituals
  Used medieval imagery, armor, swords, red crosses → reinforced symbolic power.
  Created holy books (Pensamientos), prayers, medallions — full-blown narco religion.

• Connections to ISIS & Heaven’s Gate

  • Like ISIS: Messianic figure, apocalyptic mission, public executions, religious framework.

  • Like Heaven’s Gate: Cult hierarchy, brainwashing, followers sacrificed autonomy.

    • Like cults: took from both dominant religion and added their own stuff 

• Rational Choice vs Irrational Action

• Seems irrational to worship a drug lord — but in context of failed state, poverty, and violence, this was a rational alternative offering identity, safety, and purpose.

• Reminder: Rational ≠ logical by outsider standards; it's about what makes sense within constraints.

How are the Mexican Cartels like Terrorists?

• Public & Brutal Killings

  • Beheadings, burnings (e.g. PepsiCo trucks), mass executions.

  • Violence wasn’t random — it was a message to enemies, government, and locals.

  • Use of violent lobbying

• Fear & Reputation

  • Like terrorism, these acts were meant to terrify and control populations.

  • Created a reputation of untouchability — fear = compliance.

• Game Theory

  • Strategic violence → if killing one makes 1,000 obey, it’s “worth it.”

Fear changes the payoff matrix: better to comply than resist.

How are Mexican Cartels like Corrupt Businesses?

• Engage in the markets

• Engage in market exchanges

• Networks

• Commercial

• Profit-seeking

• Political Economy