A Quantitative Analysis of the Retail Market for Illicit Drugs

49 Pages Posted: 2 Feb 2015

See all articles by Manolis Galenianos

Manolis Galenianos

Royal Holloway, University of London

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2015

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.

Keywords: drugs, moral hazard, product quality, search

JEL Classification: D82, D83, L15, L65

Suggested Citation

Galenianos, Manolis and Gavazza, Alessandro, A Quantitative Analysis of the Retail Market for Illicit Drugs (January 2015). CEPR Discussion Paper No. DP10363, Available at SSRN: https://ssrn.com/abstract=2559284

Manolis Galenianos (Contact Author)

Royal Holloway, University of London ( email )

Horton Building
Department of Economics
Egham, Surrey TW20 0EX
United Kingdom

HOME PAGE: http://www.manolis-galenianos.org/

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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