A Structural Model of the Retail Market for Illicit Drugs

Alessandro Gavazza and Manolis Galenianos

No 10363, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We estimate a model of illicit drugs markets 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 purity of drugs by approximately 20 percent and increases its dispersion more than fourfold. 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.

Keywords: Drugs; Moral hazard; Product quality; Search (search for similar items in EconPapers)
JEL-codes: D82 D83 L15 L65 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A Structural Model of the Retail Market for Illicit Drugs (2017)
Working Paper: A structural model of the retail market for illicit drugs (2017)
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