Undercover Economist

You can’t afford to get signals crossed in the underworld

“A wiseguy sees things if there are wiseguy things to see,” wrote Joe Pistone, the FBI agent better known as Donnie Brasco – the name under which he managed to infiltrate the mob. But what are the wiseguy things to see? And how is a wiseguy to know he isn’t dealing with the likes of Joe Pistone?

Such questions are among those that fascinate Diego Gambetta. Professor Gambetta, an Italian sociologist based at Oxford University, has managed to wrap himself in the language of economics as capably as Pistone wrapped himself in the language of organised crime. Gambetta is an authority on the Sicilian mafia, but deploys the tools of an economist to understand them and other criminals.

A key concept in modern economics is the “signal”, an idea developed by the Nobel laureate Michael Spence. A signal is an action that distinguishes one type of person from a would-be mimic because it would be too costly for the mimic to carry out. Spence suggested that the decision to acquire a degree might be a signal. The degree may be of no practical value but employers may still value it and quite rationally pay higher salaries to graduates. Why? Because a degree will distinguish good applicants from bad – if bright, energetic candidates are willing to go to the trouble of acquiring one, while dim, lazy candidates are not. The degree serves no educational purpose but the employer uses it to separate the wheat from the chaff.

For a criminal, the stakes are higher and the dividing lines sharper. However similar the boiled-down textbook model might seem, employing a graduate who turns out to disappoint is not the same as plotting an offence with a colleague who turns out to be an undercover cop. But while it is no easy matter to study criminal signals, the danger and purity of the signalling problem that criminals face makes them a tempting group for Gambetta to study in his new book, Codes of the Underworld.

Some signals can be crude. Drug dealers in New York sometimes force customers to use heroin or cocaine at gunpoint. Paradoxically, this has resulted in the signal being weakened: even police can legally take heroin if their lives are in danger.

Other signals seem perverse. Gambetta describes a convention in Italian academia for some established professors to celebrate the poor quality of their published work. This, he says, is a credible signal that they cannot jump ship for somewhere like Harvard – so will remain in Italian academia as powerful patrons.

Joe Pistone managed to avoid such expensive signals and send many smaller and more subtle ones. He didn’t buy drugs, for example, but he did sell stolen jewellery. He turned down a plum job in criminal accountancy, partly for personal reasons, and thus acquired credibility: everyone assumed that no undercover cop would turn down such a job. Above all, he spent years just hanging around in the right company, acquiring credibility by association. It was the long accumulation of many small signals that convinced criminals that he could be trusted.

An interesting implication of Michael Spence’s model is that if degrees really were largely signals, the world would be a better place if universities were closed down. There is an interesting parallel in Gambetta’s work: he points out that prison time provides a wonderfully credible signal. Few undercover police are likely to sign up for four or five years in jail, so an extended prison sentence can be an asset to any criminal trying to establish his credentials. Prisons are sometimes called universities of crime, but surely this is a parallel nobody expected.

Also published at ft.com.