The Economics of Counterfeiting

23 Pages Posted: 11 Jan 2009 Last revised: 22 Dec 2014

See all articles by Elena Quercioli

Elena Quercioli

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

Lones Smith

University of Wisconsin at Madison - Department of Economics

Date Written: December 3, 2014

Abstract

This paper develops a new tractable strategic theory of counterfeiting as a multi-market large game played by good and bad guys. There is free entry of bad guys, who choose whether to counterfeit, and what quality to produce. Opposing them is a continuum of good guys who select a costly verification effort. In equilibrium, counterfeiters produce better quality at higher notes, but verifiers try sufficiently harder that verification still improves. We develop and use a graphical framework for deducing comparative statics. We prove that the passed and counterfeiting rates vanish for low and high notes. Our predictions are consistent with time series and cross-sectional patterns in a unique data set that we assemble largely from the U.S. Secret Service: (1) One plus the seized/passed ratio rises in the note, but less than proportionately; (2) The passed rate rises 40-fold from $1 to $20, and levels off, dropping at higher notes; (3) Counterfeit quality rises in the note; (4) Since 1970, the seized-passed ratio is down 90%, and the passed rate is up 75%; (5) Inexpensive digital production leaped up in 1994-8; and (6) Canada’s introduction of color notes temporarily nearly stopped counterfeiting.

Keywords: counterfeiting, supermodular games, log-concavity, passed money, seized money

JEL Classification: C72, C78, E42, K14

Suggested Citation

Quercioli, Elena and Smith, Lones, The Economics of Counterfeiting (December 3, 2014). Econometrica, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1325892 or http://dx.doi.org/10.2139/ssrn.1325892

Elena Quercioli

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

Lones Smith (Contact Author)

University of Wisconsin at Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-263-3871 (Phone)
608-262-2033 (Fax)

HOME PAGE: http://www.lonessmith.com

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