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Analysis of Shadow Economy
Dr. Yu.V. Latov
COURSE PROGRAM
Topic 1. Essence and Structure of Shadow Economy. Development of Economic
Analysis into the Problems of Shadow Economy
Statistical, legal and ethical approaches to defining the term “shadow economy”. Shady
relations in the economic structure of different social systems.
Basic principles of the economic approach to analyzing criminal and law-enforcement
activities. Crime as an economic phenomenon. Economic classification of crimes: “crimes with
victims” and “crimes without victims”.
G. Becker’s “economics of crime and punishment” as a direction in neoinstitutional studies.
The spectrum of economic-criminological studies in 1970-90s.
Non-formal sector of economy in the Third World. Structuralistic approaches. Legalistic
approaches to explaining the reasons for the development of the non-formal sector and methods of
its containment. H. de Soto’s “The Other Path”. Non-formal sector in developed economies.
The tendencies of business deformalization in the period of the scientific and technological
revolution. Major trends in the analysis of economic criminality in 1980-90s.
The role of shady economic activities in the evolution of economic systems.
Topic 2. Supply and Demand at Shadow Markets
Peculiarities of pricing at the “black market” of legal goods. The discussion of 1940-1950s.
Different models of price-setting. The development of theories about price setting at shadow
markets in 1970-1990s.
Actual state of the shadow markets of legal goods: cigarettes market and weapons market.
Peculiarities of pricing at the “black market” of prohibited goods. The discussion about the
elasticity of demand for drugs. Heroine market in different models. Neoclassical concept of
antiprohibitionism in 1970-1980s: M. Friedman on drug legalization.
Evolution of the drug industry. Peculiarities of different drugs markets: heroine, cocaine,
marihuana, chemical drugs, etc. Supply and demand elasticity assessment.
Topic 3. Behavior of Producers and Consumers of Illegal Goods (e.g. Drugs) and
Law Enforcement Services
Price discrimination against the drug consumer. A model of a rational consumer of harmful
goods in the long-term period. Drug consumer’s costs. Different drug consumer models.
Factors that affect the supply of crime and harmful goods. Drug dealer’s costs. Economies
of scale in the smuggling business.
Demand for protection.
Supply of law-enforcement services. Economic rules of the law-enforcement structure
optimization. Distribution of police resources: territory, crime, and protection measures.
Topic 4. Firms in Shadow Economy
Major approaches to interpreting the concept of organized crime. Criminal organization as a
firm. Criminal organization as a financial-industrial group. Criminal organization as a quasicommunity.
Economic reasons for organized crime origination. Setting up criminal firms as a way to
minimize transactional costs.
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Economic history of organized crime as criminal business system development.
Development of national criminal organizations (Mafia, Cosa Nostra, etc). International criminal
organizations (smuggling business). Organizational structure of the present-day criminal
organizations. Economic specialization of the present-day criminal organizations.
Peculiarities of entrepreneurship in the non-formal sector: self-employment vs. wage labor.
Topic 5. Competition in Shadow Economy
Structure of various criminal goods markets.
Criminal organizations and individual criminals: support and suppression. Competition
among criminal organizations. Oligopoly in the racketeering business.
Consequences of criminal businesses monopolization from the standpoint of the society. J.
Buchanan model: decrease in criminality. Change in the structure of criminal businesses. Shift from
“crimes with victims” to “crimes without victims”. Benefits from the compromise with the
organized crime. A game model: government and two criminal oligopolies.
Attempts at modeling the consequences of the fight against the drug business.
Economic restrictions on economic concentration in shadow economy.
Topic 6. Shadow Markets of Production Factors
Specific features of wage labor in shadow economy. Models of shadow market under
capitalism and socialism. Labor distribution in LDCs.
Shadow market of capital goods. Non-formal savings and loan institutions. The development
of micro-crediting as a method of small business formalization. “Money laundering”: idea and
methods. Models of “money laundering”.
Topic 7. Uncertainty and Risk in Criminal Activities
Criminals rationalism – optimizing behavior under the conditions of risk. Maximal expected
utility models. Alternative choice models. Portfolio choice models.
Deviations from the expected utility model. Peculiarities of criminals’ behavior depending
on the type of crime.
Topic 8. Illegal Property Rights
A model of property rights specification and law enforcement activities.
Creating underground governments as way to provide criminals with public goods.
Racketeering as illegal law enforcement actions. Theory of force entrepreneurship. Development of
racketeering in the USSR/Russia.
H. de Soto on property rights specification in non-formal business. Costs of illegality vs.
costs of compliance with the law. Legality of the small business in the Third World.
Property rights diffusion under the condition of legal norms pluralism. Optimal choice of the
“umbrella” in Post-Soviet Russia.
Topic 9. Optimization of the Government Actions Combating Shadow Economy
Methods to assess the social costs of criminality.
G. Becker’s on the factors of criminality containment. Permissible combinations of crime
detection and sentencing gravity. Choice of an optimal combination. J. Stigler on the optimum of
law enforcement activities.
Police actions as production of public goods. Minimizing total societal costs of criminality.
Maximizing the utility of expenses on law enforcement.
Economic substantiation of punishment. The punishment dilemma. J. Buchanan’s solution to
the punishment dilemma.
Economic principles of judiciary system according to R. Posner. Extrajudicial sentencing
and its economic efficiency.
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Economic rules of determining the sentencing gravity: rules based on the economic yield of
the crime vs. rules based on the crime detection. Sentencing gravity optimization.
Economic principles in choosing the type of punishment. Effective choice between penalties
and penitentiary imprisonment according to G. Becker. Models of choosing between penalty and
penitentiary imprisonment on the basis of marginal benefits and marginal costs. Discussion about
the benefits and costs of capital punishment.
Government failures in combating crime. M. Friedman on combating drug abuse as a
“socialistic enterprise”. Econometric analysis of the dependency between the fight against drugs
and the number of murders. Economic analysis of the consequences of drug legalization.
Corruption as a system of shadow lobbying and rent sweep. Public benefits from and costs
of corruption. Institutional corruption in Soviet and Post-Soviet Russia.
Required Readings
Economics of Crime and Punishment. Abstract journal. Issue 1. Economics of crime and law
enforcement. Moscow: RGGU, 1999.
Economics of Crime and Punishment. Abstract journal. Issue 2. Non-Formal Sector of
Economy in Foreign Countries. Moscow: RGGU, 2000.
Becker, G. Crime and Punishment: An Economic Approach. In: Istoki. Issue 4. Moscow:
GU VShE, 2000, pp. 28-90.
Varian, H.R. Microeconomics. Intermediate Level. Modern Approach. Textbook for
universities. Moscow: YUNITI, 1997. Ch. 32 (32.1), pp. 633-636.
Latov, Yu.V. Economics of Crime and Punishment: Thirtieth Anniversary. In: Istoki. Issue 4.
Moscow: GU VShE, 2000, pp. 228-270.
Timofeev, L. Drug Industry. Basic Theory of the Economic Industry. Moscow: RGGU,
1998.
Hellman D., Alper N. The Economics of Crime: Theory and Practice. 1997.
Supplementary Readings
Buchanan, J. Limits to Freedom. Between Anarchy and Leviathan. Ch. 8. In: Buchanan, J.
Compositions. Moscow: “Taurus Alfa”, 1997, pp. 375-395.
Volkov, V. Political Economy of Violence, Economic Growth and States Consolidation. In:
Voprosy ekonomiki. 1999. N 10, pp. 44-59.
Latov, Yu.V. Economics of Crime and Punishment. In: Voprosy ekonomiki, 1999. N 10, pp.
60-75.
Levin M.I. and M.L. Tsirik. Corruption as Object of Mathematical Modeling. In: Ekonomika
i matematicheskiye metody. 1998, vol. 34, pp. 40-62.
Olson, M. Diffusion of Power and Society in Transition. Remedy from Corruption, Collapse
and Economic Sag. In: Ekonomika i matematicheskiye metody. 1995. Vol. 31. Issue 4., pp. 53-81
Pritsl, R. Corruption, Rent Oriented Behavior and Organized Crime in Russia. In:
Politeconom. 1997. N 1, pp. 64-76.
Timofeev, L. Drug Industry as an Economic industry (Theoretical Analysis). In: Voprosy
ekonomiki. 1999. N 1, pp. 88-104.
Anderson, A. Organized Crime, Mafia and Governments. In: Politeconom. 1997. N 1, pp.
92-103.
Cooter R., Ulen T. Law and Economics. 2 ed. 1997. Ch. 11, 12.
Economics of Organized Crime. Cambridge University Press, 1995.