Payment, protection and punishment - The role of information and reputation in the Mafia

A game theoretic model is used to examine the dynamics governing repeated i nteraction between Mafiosi running extortion rackets and entrepreneurs oper ating fixed establishments. We characterize the conditions under which viol ence occurs. Entrepreneurs pay protection money to the Mafia because they f ear the Mafia's ability to punish. However, the entrepreneurs' willingness to pay encourages opportunistic criminals (fakers) to use the Mafia's reput ation and also demand money. We show that two phenomena drive the repeated interaction between criminals and entrepreneurs: reputation-building and re adiness to use violence on the part of the Mafiosi, and attempts to filter out fakers on the part of entrepreneurs. These two phenomena lead to turbul ence: as entrepreneurs filter out fakers by not paying some of the times, s ome real Mafiosi are not paid and punish non-payment to establish their rep utation. As Mafia reputation is re-established, fakers have again an incent ive to emerge, setting in motion a spiral of never-ending filtering and vio lence. We also show how external shocks to this relationship, such as chang es in policing practices, succession disputes within the Mafia or inflation , often lead to violence until beliefs are re-established. We conclude that a world where mafias operate is inherently turbulent. This conclusion goes against the widespread perception that racketeers are able to perfectly en force territorial monopolies.