Working Paper: NBER ID: w14980
Authors: Manolis Galenianos; Rosalie Liccardo Pacula; Nicola Persico
Abstract: A search-theoretic model of the retail market for illegal drugs is developed. Trade occurs in bilateral, potentially long-lived matches between sellers and buyers. Buyers incur search costs when experimenting with a new seller. Moral hazard is present because buyers learn purity only after a trade is made. The model produces testable implications regarding the distribution of purity offered in equilibrium, and the duration of the relationships between buyers and sellers. These predictions are consistent with available data. The effectiveness of different enforcement strategies is evaluated, including some novel ones which leverage the moral hazard present in the market.
Keywords: Illicit drugs; Search theory; Moral hazard; Enforcement strategies
JEL Codes: J64; K14; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moral hazard (G52) | quality of drugs traded (L65) |
| long-term relationships (L14) | risks associated with moral hazard (G52) |
| enforcement strategies (K40) | buyer-seller relationships (L14) |
| buyer-seller relationships (L14) | market stability (D53) |