The value of a bad reputation: cartels, criminals, and barriers to entry

by Peter Reuter

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The phenomenon of racketeer control over an industry is much noted but there is little analysis of its sources, functioning, and consequences. This paper presents a case study of one market which has long had the reputation for racketeer control, solid waste collection in New York City. The workings of a customer allocation agreement are analyzed, focusing on the prices paid by carters in transfers of customers between them. The agreement has grown in strength over the last 25 years. It was initiated by racketeers utilizing their control of a corrupt union. However, racketeers now play a secondary enforcement role; the bulk of the returns from the agreement go to the carters themselves. The extensive prosecution and regulation of the carters since 1956 may have contributed to the agreement's strength, since the ability to exclude entrants rests on the unsavory reputation of the industry which has been enhanced by prosecution and regulation.

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