Edited by Michael Pickhardt and Aloys Prinz
Chapter 8: Criminal Networks: Lessons from the Madoff Case
Jürgen G. Backhaus 8.1 INTRODUCTION Although I cannot claim to have invented the Madoff scheme, I do claim that I was first in thinking about schemes in 1974 in one of my first publications in a long scholarly career (see Backhaus, 1980). It should be stated at the outset that Madoff’s scheme can also serve a useful purpose. One could imagine charity that works via a bubble scheme. In what follows, I first set out the analytical model and then turn to the evidence. In particular, the purpose of this chapter is to introduce the concept of homogeneity in order to give a coherent interpretation to apparently contradictory phenomena such as the evolution of a legal system and mafia-type organization. An analysis is made of the impact of homogeneity of social groups on both the structures and relationships in which transactions take place. More specifically, the concept of homogeneity entails a set of conditions that describe properties of the institutional relationships that reduce the costs of transactions among group members. In this way, the concept of homogeneity may serve to integrate what have been up to now very disparate fields such as anthropology, public choice and the theory of delinquency. 8.2 HOMOGENEOUS SOCIAL GROUPS It is by now widely accepted that social institutions exert a considerable influence on economic activity and therefore merit the attention of economists. While neoclassical economics took these institutions for granted, recent years have seen efforts to integrate them into the theoretical framework of the...
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