Endogenous Property Rights: A Dynamic Model

Abstract

In cities around the world, most of high-profile crimes committed by urban Organized Criminal Groups (OCGs) are concentrated in small geographic areas. Using detailed empirical data from a large metropolitan area of U.K., Merseyside, we document how OCG activity, violence, and territorial control are distributed across the region, revealing a strong correlation between area profitability (proxied by drug dealing) and OCGs concentration. To rationalize these observations, we propose a theoretical model of property rights that examines how OCGs strategically select areas based on profitability and the presence of rival groups. The model predicts that when OCGs are active enough, de facto property rights emerge across areas, causing a city-level conflict suppression effect. Conversely, an exogenous reduction in OCG activity can destabilize the city asymmetrically, turning the most profitable areas in hotspots of violence. Consistent with the model, Merseyside’s most profitable neighborhoods show the highest levels of violence and group turnover, whereas less valuable areas are characterized by less violence and more stability. These findings suggest that increasing police activity in a city may inadvertently escalate violence in high-value areas, offering critical policy implications for crime control strategies in urban settings.

Keywords: Dynamic Models, Endogenous Property Rights, Drugs, Organized Crime, Territorial violence