A Search-Theoretic Model of the Retail Market for Illicit Drugs

Published in: The Review of Economic Studies, v. 79, no. 3, July 2012, p. 1239-1269

Posted on RAND.org on July 01, 2012

by Manolis Galenianos, Rosalie Liccardo Pacula, Nicola Persico, Peter Reuter

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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. This model is consistent with some new stylized facts about the drugs market, and it is informative for policy design. The effectiveness of different enforcement strategies is evaluated, including some novel ones which leverage the moral hazard present in the market.

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