When the state criminalizes an activity, like drug trafficking, it ceases to protect property rights and enforce contracts in that sphere.
Criminals like property rights and contracts as much as the rest of us, however, and so absent a state they will create one.
For example, states behind bars:
The illegal narcotics trade in Los Angeles has ï¬‚ourished despite its inability to rely on state-based formal institutions of governance.
An alternative system of governance has emerged from an unexpected source—behind bars. The Mexican Maï¬a prison gang can extort drug dealers on the street because they wield substantial control over inmates in the county jail system and because drug dealers anticipate future incarceration.
The gang’s ability to extract resources creates incentives for them to provide governance institutions that mitigate market failures among Hispanic drug-dealing street gangs, including enforcing deals, protecting property rights, and adjudicating disputes.
A new paper from David Skarbek.
See previous posts on creative contract enforcement in Italy (a.k.a. the mafia).