Have gangs become more like corporations in drug dealing than just social groups? Levitt and Venkatesh use quantitative data from a now defunct gang to look at the inner workings of gang finances. They uncover four distinct aspects of gang financial structure:
The data comes from a gang leader who kept monthly financial data over a four-year period. This gang leader was one of many with territorial responsibility, who acted on behalf of central leadership. The gang ran a twelve block square area in an inner city that was mostly black. The population had high unemployment, lack of family structure, lack of education and many living in poverty. Outsiders rarely moved in.
Drug sales accounted for as much as 78% of revenue, with 14% from dues and 8% from extortionary taxes. Over the four-year period, monthly revenue increased from $18,500 to $68,400. The increase in monthly bags of crack sold also increased from 1,310 to 7,931. The number of drug dealers ranged from 25 to 75. The expansion in the crack market parallels the revenue growth for the gang. Even though prices of crack began to fall after the first year, the increase in monthly quantity sold, especially the 250% sales growth from year three to year four due to territory expansion, boosted the revenue.
The gang spent the majority of its revenues paying wages of gang members. Although the gang resembled a corporation, the wages were highly skewed to the extremes. The gang leader, comparable to a division head reporting directly to the CEO, made between $4,200 and $10,900 a month, which is much higher than what someone with similar experience and education could earn in the legal sector. One rung below, Officers (three in total) earned a mere $1000 a month. The lowest job, the foot-soldiers, only made around $200 a month. Working about 20 hours a week, foot-soldiers earned less than the minimum wage. This is probably due to the low skill requirements and expendability of the position. To explain the desire to be in a high-risk job that paid little, Levitt and Venkatesh compared joining the gang to entering a tournament. If a foot-soldier manages to rise to the top of the entire gang system (become a central leader), a 16/3000 chance, he can win big. Interviews conducted by Venkatesh confirmed that foot-soldiers hoped to eventually climb to the top.
Within the gang’s turf, the gang held significant local market power, indicated by the drug price markup over the marginal price. However, the price and markup change depending on gang strategy and where gang warfare occurs. Using violence in a rival’s turf could help shift demand into one’s own turf by scaring customers away from the rivals. Prior to the territorial expansion and gang war, the gang priced below marginal cost, possibly to punish a rival after an attack or to maintain market share by not having demand shift away after the attack. In addition, the increased cost of foot-soldiers during the war increased the marginal cost of selling as the costs of running the gang grew. However, prices doesn’t fall as it did before the gang war.
The lower ranked members of a gang have significant risks that are apparent, but still join and participate. While the national homicide victimization rates for black males 14-17 in the US is 1 in 1000, the rates for this gang are 1 in 100. If a member was in the gang all four years, he had a 1 in 4 chance of dying. Considering the changes in likelihood of death and wages in different scenarios, Levitt and Venkatesh use a regression to find the implicit value the foot-soldiers place on their lives. All results show a willingness to accept risks of death, with values ranging from $7,500 to $110,000. Interviews with members expressed the need to survive at any cost and the lack of other alternatives.
Throughout the analysis, Levitt and Venkatesh found that street-dealing is not as lucrative as might be portrayed. The risks are high and the pay is low. If one manages to reach the top, he is rewarded. However, those on the bottom will most likely encounter physical harm of some degree. One possible policy implication of this research would be to get youths into jobs and away from participating in a gang. If attractiveness of employment in the legal sector increased and the low returns of gang participation were more widely known, youth gang participation might decrease.
These gangs are not a bunch of friends running around on the street, but a machine that has specific wheels and springs in certain places. The gang was organized somewhat like a corporation. Because the information and data used to support the authors’ arguments is so unique, I felt almost every piece of analysis was interesting. Anyone can guess about gangs’ profits and where the specific costs and revenues come from, but this data showed it. Even though the gang is dangerous and pays the low people very little, the gang has such a sense of loyalty and family that any gang member will receive a proper funeral with costs up to $5,000.
The only drawback I found, which the authors tried to address, is the reliability of the numbers in the data. Because the gang conducts illegal business, its members could also cheat the gang itself. The amount of “off the books” transactions could be large, with dealers skimming profits and members running their own scams to make money at the cost of the gang. The authors suggest the numbers are probably the lower bound, but by how much? Also, whether this gang is representative of other gangs is unknown.