Working Paper: CEPR ID: DP10363
Authors: Manolis Galenianos; Alessandro Gavazza
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., theirpurity) only after consuming them. Hence, sellers can rip off first-time buyers or can offerhigher-quality drugs to induce buyers to purchase from them again. In equilibrium, adistribution of qualities persists. The estimated model implies that sellers? moral hazardreduces the average purity of drugs by approximately 20 percent and increases its dispersionmore than fourfold. Moreover, increasing penalties may increase the purity and affordabilityof the drugs traded because doing so increases sellers? relative profitability of targeting loyalbuyers versus first-time buyers.
Keywords: drugs; moral hazard; product quality; search
JEL Codes: D82; D83; L15; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sellers' moral hazard (D82) | average purity of drugs (L65) |
| sellers' moral hazard (D82) | dispersion of quality (L15) |
| increasing penalties (K40) | average purity of drugs (L65) |
| increasing penalties (K40) | affordability of drugs (I10) |
| decrease in penalties (K40) | average quality of drugs (L65) |
| decrease in penalties (K40) | quality dispersion (D39) |