The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity

Christiern Rose

No 16-643, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Retail prices of illicit drugs have fallen despite rising supply disruption. This article presents and empirically tests a model which may explain the price puzzle. Supply disruption increases the cost of purity. Illicit drugs are experience goods, with demand depending on the seller’s purity reputation. There is an equilibrium in which seizures decrease purity, reducing future demand and prices. These predictions are tested using monthly data for crack cocaine in Washington DC. Persistence of the series is exploited to handle endogeneity resulting from seizures mirroring supply. A 10% increase in seizures reduces purity by 4.7% and future prices by 2.3%.

Keywords: Illicit drugs; seizures; seller reputation (search for similar items in EconPapers)
JEL-codes: K14 L11 L14 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-com and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:30430

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