Anna writes*
Stereotypically, the Italian mafia is associated with drugs, gambling, prostitution, and violence. But is organized crime only dealing with illicit activities? Unfortunately, not. In the last decades, the line between illegal organizations and legal business has blurred due to organized criminals’ increasing involvement with business owners, within and beyond Italian borders. In 2007, for example, mafia affiliates took over FirstPlus Financial Group, a Texas company. Illegal and extortive means were used to loot legitimate business profits.
Organized criminals are profit-maximizing actors. However, mafiosi are not ordinary entrepreneurs. Rather, they are providers of the trust and protection “commodities.” These criminals have the ability to transform their connections with economically and politically legitimate actors – social capital – into economic resources in exchange for service provision. Namely, the mafia can provide the essential trust and protection to enable commercial transactions in contexts with weak formal institutions and high entrance barriers to the credit market. Therefore, the mafia becomes a form of social insurance and economic stabilizer, especially in the most vulnerable territories. For instance, after the 2008 financial crisis, the Italian provinces with a comparatively higher presence of organized crime experienced the lowest decline in the number of new enterprises. Mafia control ensured that local economic exchanges could continue. It also ensured that the mafia were paid post-crisis, as they delivered both the demand for protection — and its supply.
Small business owners need protection from the mafia’s threats and the ensuing economic uncertainty. They passively suffer from extortion and pressure to pay pizzo — either in money or obligation (such as protecting or employing a mafia ally). The mafia has diversified personalized relations that vary with the type of entrepreneur. Some businesspeople preemptively seek protection, which they perceive as an unavoidable cost of doing business. Entrepreneurs in a stronger positions get access to illicit finance and protection in exchange for their pizzo.
Evidence shows that the pizzo-profits ratio shrinks as business size increases, falling from 40% of profits for small firms to 2% for the largest enterprises. This parallel taxation system finances other mafia activities. Threats of violence enforce compliance. Among its dire negative externalities, this system hinders the economic development, since smaller firms pay for protection instead of growth. Larger firms, on the other hand, actively cooperate with the mafia to negotiate reciprocal advantages, further supporting the criminals and weakening development.
Bottom line: The mafia is a profit-maximizing actor who pursues its self-interest by extorting rather than adding value as a business. This entrepreneur-criminal nexus operates in the “grey area” between legal and illegal activities and hampers local economic development.
* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂
Interesting article. Good topic and quite insightful.
Possibility to apply managerial econ to Mafias towards following hypotheses:
= Mafias provide market infra and hence facilitate growth and stability of markets when no formal legal, financial and market system exists (or are not operational). It is path dependent.
= As this ecosystem grows it cannot compete with formal legal and financial institutional system (if one emerges and/or becomes operational) and mafia system becomes more costly (cost of enforcement is higher) forcing the Mafias to extract more from its ecosystem to the point it becomes predatory.
Thanks for your comment Rahul!
I agree with your hypotheses of the mafia as market infrastructure providers. Your first point definitely explains why the presence of organized crime in some southern Italian municipalities is associated with weak/absent/corrupt local public administrators and formal channels to conduct business.
I wonder whether the mechanism in your H2 is only unidirectional (no formal system > mafia fills the gap > formal system grows > predatory mafia) or if it also works in the other direction (functioning formal system > mafia tries to seize existing profit opportunities on the margin > formal system slowly starts shrinking/giving in to corruption > mafia takes over the previous formal system). For example, the inflow of EU funds for development increased mafia infiltration in some local governments: in this case, initially “bigger” operating formal institutions (thanks to the additional resources from the EU) led to a growth in mafia-led infrastructures, overtaking the formal institutions.
This was an interesting economic angle on the pizzo culture and its challenges for Italian businesses. Paying for protection instead of growth is a major disruption and a challenge that businesses shouldn’t have to tackle. An interesting and optimistic insight into this phenomenon is that despite the prevalence of pizzo culture, there is resistance against it. A good example is the “Addiopizzo” movement in Sicily, which started as a student initiative in 2004 and has since then grown into a wider resistance movement. They encouraged people to do business with shops that did not pay pizzo, giving these businesses a “mafia-free status” and thus advocating for critical consumption while providing support. From an economic standpoint, the success of such movements highlights the potential for creating a sustainable local economy by encouraging consumers to support businesses that refuse to engage in illegal practices. This not only helps weaken the mafia’s economic hold but also encourages a healthier, more competitive market, where businesses can thrive without the weight of paying for protection. One can hope that initiatives like this would gain even more traction and thus increase stability and long-term growth for businesses in the regions affected by mafia.
Thanks for your comment Lotta! Addiopizzo is a very good example of how organized crime can be fought thanks to grassroots initiatives and progressive changes in the local culture. A very recent update about the movement: Addiopizzo launched its own mobile app in January 2025, where the shops and businesses that do not pay for the pizzo and are part of the initiative are signalled on a map for consumers to make more informed choices. Hopefully, these small but consistent steps forward will bring positive results in the long run!
Hi Anna, great analysis! The way the mafia mixes with legitimate businesses is really eye-opening. It reminds me of how organized crime can affect industries beyond just the typical ones like gambling or drugs. Take the fake olive oil scandal in the Netherlands, for example.
Mafia groups have been known to fake and dilute high-quality olive oil, then sell it as premium products at higher prices. This kind of activity messes up market prices, harms honest businesses, and tricks consumers into thinking they’re getting healthy, authentic products. Just like with small businesses paying for protection, the fake olive oil trade often relies on economic pressure to keep going, either by offering “protection” to those involved or ignoring illegal practices.
It’s a clear example of how organized crime operates in the “grey area” between legal and illegal activities, affecting industries that seem far removed from criminal involvement. It’s not just about direct extortion; it’s about unfair competition and damaging consumer trust, which ultimately hurts the legitimate economy.
Thanks for your comment, Sarah!
You mentioned an interesting case and it really highlights how the mafia can operate “in silence” in sectors one would not expect. These practices make it more complex for consumers, and also authorities, to distinguish where the border between legal and illegal lies. Giovanni Falcone, one of the most prominent Italian magistrates who dedicated his life to fighting organized crime, said that the best strategy to uncover mafia structures is to “follow the money.” In these grey areas, this approach truly applies: the activity in itself is legit, so to understand the criminal structure behind the business, one must investigate the roots of the involved actors and the origin of their resources.