On the Macroeconomic Effect of Extortion: An Agent-Based Approach

Alejandro Platas-López,Francisco Grimaldo,Alejandro Guerra-Hernández

doi:10.18564/jasss.4496

Abstract

This work proposes an agent-based approach to study the effect of extortion on macroeconomic aggregates, despite the fact that there is little data on this criminal activity given its hidden nature. We develop a Bottom-up Adaptive Macroeconomics (BAM) model that simulates a healthy economy, including a moderate inflation and a reasonable unemployment rate, and test the impact of extortion on various macroeconomic signals. The BAM model defines the usual interactions among workers, firms and banks in labour, goods and credit markets. Subsequently, crime is introduced by defining the propensity of the poorest workers to become extortionists, as well as the efficiency of the police in terms of their probability of capturing these extortionists. The definition of BAM under Extortion Racket Systems (BAMERS) model is completed with a threshold for the firms rejecting extortion. These parameters are explored extensively and independently. Results show that even low propensity towards extortion is enough to find considerable negative effects such as a marked contraction of Gross Domestic Product and increased unemployment, consistent with the little known data of the macroeconomic effects of extortion. The effects on consumption, Gini index, inflation and wealth distribution are also reported. Interestingly, our results suggest that it is more convenient to prevent extortion, rather than combat it once deployed, i.e., no police efficiency level achieves the healthy macroeconomic signals observed without extortion.

Highlights

We alternatively propose to cope with the lack of data by modeling and simulating extortion in terms of the behavior of the agents involved in a simulated economy, i.e., focusing on the underlying microfoundations and analyzing the emerging macroeconomic signals
BAM under Extortion Racket Systems (BAMERS) is analyzed in terms of the proportion of workers acting as extortionists, jailed extortionists and extorted/punished firms
Beyond being a kind of tax that increases the cost of firms, extortion is a source of fear that spreads throughout the economic system, decreasing investment and growth (Elsenbroich et al )

Summary

Introduction

The tax, paid in cash, goods, or services, is known as pizzo in Italy or piso in some Latin American countries. Such criminal activity is present in many economies (Konrad & Skaperdas ), the interest in studying its macroeconomic e ects and the microfoundations that generate them. We propose a methodology consisting in simulating a healthy economy and introducing extortion at di erent levels of activity, comparing subsequently the macroeconomic signals produced in both situations. . Our approach is justified given the hidden nature of extortion that makes it di icult to determine both its extent, and its diverse and complex e ect on society (Troitzsch ); either at an individual or collective level (Gutierrez-Garcia et al ).

Objectives

Methods

Results

Conclusion