A Structural Model of the Retail Market for Illicit Drugs

Manolis Galenianos and Alessandro Gavazza

American Economic Review, 2017, vol. 107, issue 3, 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.

JEL-codes: D12 K42 L15 L65 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20150540
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Citations: View citations in EconPapers (25)

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Related works:
Working Paper: A structural model of the retail market for illicit drugs (2017)
Working Paper: A Structural Model of the Retail Market for Illicit Drugs (2015)
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