Commerce and Crime: States, Property Rights, and the War on Trade, 1700-1815
Christina Gathmann & Henning Hillmann

Why do governments actively promote criminal behavior? History up to the present day provides many examples where states have not suppressed but rather supported activities like extortion, production of illegal commodities, smuggling or outright terrorism. Yet evidence strongly suggests that the costs involved are dramatic: countries have lower economic growth and a high potential for political conflict. This study uses new quantitative evidence on eighteenth-century British and French privateering – state-licensed piracy and commerce raiding by private ships – to identify the conditions under which states promote criminal and semi-legal activities, and how these activities influence economic and political performance. Privateering is an institutional arrangement that enforces property rights of domestic merchants but denies foreign merchants the same rights. A selective property rights model is used to demonstrate how legalizing illegal piracy as privateering was also a domestic political instrument that worked much like patron client networks in binding elites to the interests of state-building princes. For merchants, privateering was a means to compensate for trade losses during war. For state-building rulers, it provided a supplement to the navy at no cost and, in true mercantilist fashion, undermined the trade of rival states.

http://web.mit.edu/econsocseminar/www/privateers_MIT20062.pdf