WHEN DOES ORGANIZED-CRIME PAY - A TRANSACTION COST-ANALYSIS

This paper develops a transaction cost-based theory of organized crime . Following Schelling (Journal of Public Law 1967;20:71-84), I treat t he organized criminal firm as a formal governance structure that speci alizes in providing illegal goods and services to downstream buyers. D rawing upon Williamsonian transaction cost analysis and the literature on self-enforcing contracts, the paper predicts which illegal goods a nd services will be supplied in the marketplace by organized criminal firms versus internally by downstream firms. The paper highlights the joint roles of production scale economies, contracting frequency, tran saction specificity, and uncertainty to predict the activities of orga nized crime. These four factors appear capable of explaining many of t he important empirical regularities in markets where organized crime i s present.