Peru | Crime and punishment: an economic analysis

Peru | Crime and punishment: an economic analysis

The rise of criminality is currently what weighs most heavily on Peruvians. In particular, the growth of extortion is hitting transport operators, shopkeepers, and entrepreneurs hard, affecting the normal development of their activities and their physical integrity. In the last five years, monthly reports of extortion have multiplied by five.

In addition to the regrettable personal costs, criminal activities also generate costs for the economy. At BBVA Research, we estimate that, in Peru, the increase in insecurity between 2021 and 2024 negatively impacted the income generated by each Peruvian during that period by about 3.0%. Likewise, we calculate that spending on security was equivalent to 3.1% of GDP (currently more than USD 10 billion), resources that, in large part, could be allocated to investment.

How can we understand the rapid advance of criminality in Peru? In 1968, Gary Becker, Nobel Laureate in Economics, published “Crime and Punishment: An Economic Approach”, one of the foundational works of the economics of crime. Becker established that individuals decide to commit a crime as a result of a rational process in which they evaluate whether the expected benefit (Y) exceeds the expected cost. The expected cost of committing a crime is summarized in two variables: the probability of being caught (p) and the severity of the sanction or punishment (f). Furthermore, Becker demonstrated empirically that most criminals are risk-prone. Therefore, an increase in p has a significantly greater deterrent effect than an increase in f.

The analysis of the extortion phenomenon in Peru (from the “collection of quotas” from public transport and shops to “drop-by-drop” loans) under the Becker model reveals the existence of a highly efficient criminal market, in which economic incentives are severely distorted in favor of the criminal.

In the first place, this illicit activity represents a high and recurring expected benefit (Y) for the wrongdoer. Unlike common theft, which is a “one-time payment transaction” with a high search cost for each victim, extortion operates as an illicit “subscription model.” The rent is fixed and generated with a low marginal cost: the extortionist establishes a periodic payment (daily, weekly, or monthly) and, once the initial threat is established, the cost of maintaining the collection from that same victim is almost zero. Furthermore, extortion can be scaled massively: a single criminal group can extort hundreds of transport operators or merchants simultaneously using basic technology (instant messaging and digital wallets).

In the second place, the probability of capture (p) is close to zero, so the severity of the punishment (f) becomes irrelevant: it does not matter how high the penalty is on paper. In Peru, p is very low due to three structural factors: (i) people do not report the crime because the police do not guarantee effective protection; (ii) anonymity: the use of unregistered SIM cards, bank accounts in the names of third parties, and digital tools reduces the operational traceability of the extortionist; and (iii) corruption or lack of investigative capacity dilutes p at every stage (arrest, indictment, and conviction).

A third element is the “strategic investment in a reputation for violence.” To reduce their operating costs, extortion gangs resort to demonstrative violence. Burning a vehicle or attacking a business is not intended to destroy the victim, but to send a signal to the rest of the market. The gang makes an “initial expenditure” on real violence so that the future threat is credible. This reduces the cost of convincing subsequent victims to pay without resisting to almost zero.

In the fourth place, operating and entry costs are low. Setting up an extortion network in Peru requires minimal initial capital: a mobile phone, access to personal data (frequently leaked or purchased in informal markets), and cheap labor for physical execution (youth hitmen or criminals hired on a piecework basis).

Finally, the opportunity cost for criminals is extremely low. In a country with high labor informality (around 70%) and stagnant real incomes for young people in vulnerable sectors, joining an extortion gang has a very low opportunity cost compared to immediate illicit gains.

In this context, within the framework of the request for delegation of legislative powers, the government has proposed, to combat insecurity: (i) strengthening police operations and intelligence; (ii) reinforcing control of transport and borders; (iii) accentuating coordination between the National Police, the Public Prosecutor's Office, and the Judiciary; and (iv) creating new criminal offenses (extortionate demand) and promoting prison reforms, among other actions. The first three groups of measures aim directly at raising p, reducing the margin of impunity. In addition, border control measures increase the effort and operational risk that a criminal gang must assume to operate in the country (i.e., they increase the transaction costs of committing a crime). Regarding the fourth group, measures aimed at increasing the severity of penalties (f) can be useful, but if the probability of conviction (p) remains low, the deterrent effect of increasing penalties is almost null.

It should be added that, in his analysis, Becker considers not only punishments, but also the return on legal activities versus illegal ones. An individual opts for crime if the illicit income exceeds what they could earn in the formal labor market. Therefore, structural measures that increase the opportunity cost of committing a crime, such as reducing labor informality and incentives for youth job creation in vulnerable areas, contemplated in the delegation of powers, would also help.

The growth of criminal activities, such as extortion, is wreaking havoc on the lives of good Peruvians who cannot carry out their productive activities normally and who see their physical integrity constantly threatened. This scourge requires a forceful and immediate response, as well as short-term results. If we let criminality continue to advance, we run the risk that it will continue to corrode our already weak institutions, with serious social consequences, as we have witnessed in other countries. There is no time to lose.

Hugo Perea

Chief Economist for Peru at BBVA Research

Article published in El Comercio on September 29, 2026