Extortion of productive enterprises (‘shops’) by organized crime groups (‘gangs’) takes place in virtually all economies. We develop a framework to study this activity. The main harm of extortion comes from the long‐run erosion and distortion of useful production, as well as from the destruction of property that we show can occur in equilibrium. Among other results, we also find: gangs may increase their activity in response to increased police protection; often, but not always, forward‐looking gangs induce lower resource waste than myopic gangs.
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Konrad et al. (1998) studied this question.
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