Addiction and Illegal Markets

Shingo Ishiguro (), Sultan Mehmood and Avner Seror
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Shingo Ishiguro: Graduate School of Economics, Osaka University, https://sites.google.com/view/ishiguro/

No 2431, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper studies dynamic contracts in illegal addictive markets where individuals’ tastes for addictive goods develop through prolonged consumption and contract enforcement is limited. Our theoretical analysis uncovers the optimality of a ‘freefirst- dose’ strategy where sellers intensify buyers’ addiction by offering consumption credit to newcomers. We show that buyers default a certain portion of the debts for early period consumption but are never imposed any penalty on the equilibrium path. This implies that illegal markets might favor non-violent interactions over violent ones, defying the stereotypical association of illegality with violence. Meanwhile, in illegal gambling markets, a distinct equilibrium phenomenon known as the long-shot bias emerges due to the influence of addiction, illustrating another complex dynamic within these markets. We discuss the implications of the model in the context of illegal sports wagering, narcotics, and religious sects.

Keywords: Addiction; Dynamic Contracts; Illegal Markets (search for similar items in EconPapers)
JEL-codes: D21 D40 D91 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2024-09
New Economics Papers: this item is included in nep-mic
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Working Paper: Addiction and Illegal Markets (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2431

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