The economics of extortion: Theory and the case of the Sicilian Mafia

This paper studies extortion of firms operating in legal sectors by a profit-maximizing criminal organization. We develop a simple taxation model under asymmetric information to find the Mafia optimal extortion as a function of firms’ observable characteristics, namely size and sector. We test the predictions of the model on a unique dataset on extortion in Sicily, the Italian region where the Sicilian Mafia, one of the most ancient criminal organizations, operates. In line with our theoretical model, our empirical findings show that extortion is strongly concave with respect to firm size and highly regressive. The percentage of profits appropriated by the Mafia ranges from 40% for small firms to 2% for large enterprises. We derive some implications of these findings for market structure and economic development.