A Structural Model of the Retail Market for Illicit Drugs
American Economic Review
vol. 107,
no. 3, March 2017
(pp. 858-96)
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 if drugs were legalized, in which case purity could be regulated and hence observable, the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent. Moreover, increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers' relative profitability of targeting loyal buyers versus first-time buyers.Citation
Galenianos, Manolis, and Alessandro Gavazza. 2017. "A Structural Model of the Retail Market for Illicit Drugs." American Economic Review, 107 (3): 858-96. DOI: 10.1257/aer.20150540Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- K42 Illegal Behavior and the Enforcement of Law
- L15 Information and Product Quality; Standardization and Compatibility
- L65 Chemicals; Plastics; Rubber; Drugs; Biotechnology