A Structural Model of the Retail Market for Illicit Drugs

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 D12, K42, L15, L65)

Non-Salient Fees in the Mortgage Market

“…The findings are consistent with a standard search framework that yields a specialization equilibrium, in which high-cost lenders are able to attract "uninformed", that is less cost-sensitive consumers, but not informed consumers, who go to low-cost lenders, yielding a separating equilibrium or equilibrium price dispersion (Salop and Stiglitz, 1977, Varian, 1980, Galenianos and Gavazza, 2017. In the following, I discuss how this can be interpreted in the context of a differentiated product market model in line with the borrower-level discrete choice analysis.…”

Intermediaries and product quality in used car markets

“…Recent examples include Hendel, Nevo, and Ortalo-Magné (2009), Gavazza (2016), Salz (2017), and Donna et al (2018). One exception is Galenianos and Gavazza (2017), who estimate a model of cocaine buyers and sellers and show that reputation concerns help support an equilibrium where the dealer offers high-quality drugs in the presence of asymmetric information. However, unlike in their setting where trades only happen through dealers, both dealers and individuals facilitate trades in the used car market, and we examine both the information asymmetry story and the assortative matching story.…”

“…Although an intermediary's aforementioned roles have been well recognized on the theoretical side, the literature on the empirical side almost exclusively emphasizes that intermediaries save search costs. One exception in addition to Galenianos and Gavazza (2017) discussed above is Peterson and Schneider (2014), who report that cars sold by dealers require fewer repairs than cars sold by sellers, although this is not their primary focus. Gavazza (2016) shows that dealers reduce trading frictions through costly intermediation, but also impose an externality by crowding out the number of unmediated transactions.…”

Light cannabis and organized crime: Evidence from (unintended) liberalization in Italy

“…From a theoretical point of view, the entry of legal retailers of marijuana can have several effects on the market. Besides a potential market expansion of marijuana users, it makes the market more competitive, more transparent and solves the problem of moral hazard associated with the purity of drugs (see e.g., Galenianos and Gavazza 2017). Legal retailers can offer a controlled substitute product potentially displacing the demand and hence the equilibrium supply in the illegal market where the organized crime often operates in regime of monopoly.…”