Illegality blocks credit markets, preventing separation of ownership and management

Evidence

There is no evidence of such separation in illegal enterprises in general. Reuter (1983) argues that this is a consequence of illegality itself (119ff.), which makes the development of a credit market extremely difficult. That is, no one is prepared to lend substantial sums of money to illegal firms because (1) they do not keep properly audited books for fear of criminal prosecution and hence cannot be monitored; (2) they cannot provide effective collateral; and (3) since loans have to be made to individuals rather than enterprises, solvency is too dependent on the fate of a single man. Credit limitations make it impossible for firms to grow, as they have to rely entirely on self-financing; and because they cannot grow, they cannot reach the size which warrants a separation of ownership and management. Ingenious as this explanation is, I think it does not represent the foremost reason why management and ownership are indivisible in the protection industry. — Diego Gambetta, The Sicilian Mafia The Business of…, 830

Categorization

• XREF: Directly engages the economic-institutions literature (Milgrom et al., private ordering, reputation capital) the reader is bridging the mafia to. Also reminiscent of Barzel’s work on measurement and enforcement costs.