I suggested in another thread to have a value for bandit lair "strength", which would very gradually increase or recover over time. At low strength, the bandit parties would be small, and therefore fast and hard for the larger armies to catch. As bandit strength increases, bigger parties spawn, and those become more and more vulnerable to being caught by regular army units or patrols. As they suffer losses, strength decreases and the parties spawn at a small size again. The only way to "solve" the bandit issue would be to do enough damage often enough that their strength never has a chance to recover, and only one or two small parties would be out chasing peasants, but far too small to take on caravans. As long as you make periodic sweeps, you should be able to keep the bandit population somewhat in check. They would always come back eventually, however.
Tying it to character level is just wrong. I HATED that in games like Oblivion and Fallout 3 where leveling made the game harder, not easier, unless you exploited the system. That made RP difficult, even if it was fine for min/max players out to "beat" the game, and a lot of character builds were simply not viable because your combat skills would fall increasingly behind on the leveling curve.
As for the economy, there's an economy?
?
