A Quantitative Analysis of the Retail Market for Illicit Drugs

Manolis Galenianos and Alessandro Gavazza

STICERD - Economics of Industry Papers from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: We develop a theoretical framework to study illicit drugs markets and we estimate it using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs' quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that sellers' moral hazard reduces the average and increases the dispersion of drug purity. Moreover, increasing penalties may increase the purity and affordability of the drugs traded because doing so increases sellers' relative profitability of targeting loyal buyers versus first-time buyers.

Date: 2014-12
New Economics Papers: this item is included in nep-com
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https://sticerd.lse.ac.uk/dps/ei/ei53.pdf (application/pdf)

Related works:
Working Paper: A quantitative analysis of the retail market for illicit drugs (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stieip:53

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