Working Paper: NBER ID: w9572
Authors: James E. Anderson; Oriana Bandiera
Abstract: Why does illegal trade often flourish without formal enforcement, but sometimes fail? Why do illegal trade-reducing policies often fail? Why do States often appear to tolerate illegal trade? A model of trade with cops and robbers provides answers. `Safety in numbers' is a key element: the equilibrium probability of successful shipments is increasing in trade volume. Even without conventional fixed costs, safety in numbers implies scale economies which can explain the absence or robustness of trade subject to predation. Spilling over between markets, safety in numbers implies that illegal trade can foster legal trade and State revenue.
Keywords: No keywords provided
JEL Codes: F1; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade volume (F10) | probability of successful shipments (L87) |
| more traders (F19) | capacity to disrupt trade (F19) |
| state raids (H77) | illegal trade (F19) |
| illegal trade (F19) | legal trade security (F19) |
| revenue-maximizing state (H27) | tolerance of illegal trade (K42) |