An Economic Analysis of Maritime Piracy and its Control

Date01 September 2013
AuthorPaul Hallwood,Thomas J. Miceli
Publication Date01 September 2013
Paul Hallwood and Thomas J. Miceli
Modern-day piracy on the high seas poses a serious threat to international ship-
ping. This paper develops an economic of model of piracy that emphasizes the
strategic interaction between the ef‌forts of pirates to locate potential targets,
and shippers to avoid contact. Implementation of optimal enforcement policies is
complicated by the need for international cooperation in the apprehension and
prosecution of pirates. Free riding and other problems therefore impede the
ef‌fectiveness of current international laws against piracy.
This paper develops an economic model of the interaction of maritime pirates
and international enforcement agencies with the goal of assessing the ef‌fective-
ness of international law, and of examining potential revisions aimed at reduc-
ing the incidence of piracy. Specif‌ically, we examine the question of why
international cooperation has proven to be largely inef‌fectual. For example,
Kontorovich and Art (2010) found that over the period 19982009, less than
2% of acts of maritime piracy were prosecuted, whereas Shortland and Vothkn-
echt (2011), using an econometric model, found that naval patrolling in the Gulf
of Aden (beginning in 2008) might only have stabilized the level of piracy at a
high level and may also have caused it to shift to more lightly patrolled areas.
Various arguments have been put forward to explain this failure of enforce-
ment. The UN Secretary General has pointed to gaps in domestic laws, and
reluctance to bear the expense of imprisoning pirates (United Nations, 2010,
p. 10). Mo (2002) argues that it is due to a lack of cooperation among naval
powers. Campanelli (2012) points to a lack of a global hegemon, implicitly
acknowledging failure in international cooperation that a hegemon might
promote. In contrast, Bulkeley (2003) and Farley and Gortzak (2009) point to
some success in multilateral cooperation in South East Asian waters, with the
latter highlighting the important role of US leadership there.
On the question of international law governing maritime piracy, Andersen
et al. (2010) and Ivancovich (2011) point to the lack of an ef‌fective governing
legal framework. Indeed, the lack of such a framework bedevils international
public law as a whole, not just in the area of policing and enforcement against
University of Connecticut
Scottish Journal of Political Economy, Vol. 60, No. 4, September 2013
©2013 Scottish Economic Society.
maritime piracy. As Goldsmith and Posner (1999) and Brunnee and Troope
(2011) argue, whether a country agrees to abide by international treaty law is
voluntary as no country is obligated to sign a treaty, and clauses can always
be written in a way that allows countries to sign but leaves them with minimal
or undef‌ined obligations. For example, under the Law of the Sea, signatories
agree to ‘cooperate,’ but as the term is not def‌ined, there are no sanctions for
failing to cooperate.
Our investigation is based on a standard Becker-type model of law enforce-
ment (Becker, 1968; Polinsky and Shavell, 2000), which we extend to consider
the ef‌fort level of pirates to locate and attack target vessels, and of shippers
to invest in precautions to avoid contact. We then use the model to evaluate
the feasibility of the resulting optimal enforcement policy within the context
of international law, and conclude by proposing some changes that might
improve matters.
Previous theoretical literature on piracy has taken one of two routes. One
strand focuses on the organization and governance of pirates in a modern
context (Bahadur, 2011), as well as in a historical context (Leeson, 2007). The
other strand examines the economic gains from piracy. For example, Ander-
son and Marcouiller (2005) analyze piracy in a two-country Ricardian model
of trade. In the paper closest to ours, Guha and Guha (2010) examine self-
insurance by merchants and third-party enforcement as complementary
approaches to the control of piracy. They show that increased enforcement
does not involve moral hazard in the sense that it may, conceivably, decrease
the amount of self-insurance that merchants invest in. Our model extends this
literature by examining in more detail the strategic interaction between pirates
and shippers, and derives the optimal enforcement policy in that context. We
set the stage for the analysis by brief‌ly reviewing the state of modern-day
Maritime piracy is a worldwide phenomenon with 2619 attacks, actual or
attempted, over the period 20042011, with no recent decline in incidence.
Somali pirates are responsible for the largest proportion of attacks, averaging
well over 100 in recent years in the Gulf of Aden, the Red Sea, the Arabian Sea
and the Western Indian Ocean as far south as Tanzania and as far east as the
Maldives. Maritime piracy also occurs at noticeable levels in Southeast Asia
and West Africa (each with about 30 attacks per year). There are lower rates of
incidence in the Far East, the Americas, and of‌f the Indian sub-continent.
Examination of International Maritime Bureau narrations of piracy attacks
indicates that Somali piracy is aimed at taking ships and their crew hostage
Article 100 of the United Nations Convention on the Law of the Sea establishes a duty
of nations to cooperate “to the fullest possible extent in the repression of piracy on the high
seas or in any other place outside the jurisdiction of any State.”
Data are from the International Maritime Bureau, ICC-IMB Piracy and Armed Robbery
against Ships Report, Various: Annual Report, 2010, Annual Report 2011, Report of January
1st to June 30th, 2009. Report of January 1st to June 30th, 2012.
Scottish Journal of Political Economy
©2013 Scottish Economic Society

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