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

52 Pages Posted: 26 May 2009 Last revised: 9 Jun 2009

See all articles by Manolis Galenianos

Manolis Galenianos

Royal Holloway, University of London

Rosalie Liccardo Pacula

University of Southern California - Schaeffer Center for Health Policy and Economics; National Bureau of Economic Research (NBER)

Nicola Persico

Northwestern University - Kellogg School of Management

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Date Written: May 2009

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.

Suggested Citation

Galenianos, Manolis and Pacula, Rosalie Liccardo and Persico, Nicola, A Search-Theoretic Model of the Retail Market for Illicit Drugs (May 2009). NBER Working Paper No. w14980, Available at SSRN: https://ssrn.com/abstract=1408900

Manolis Galenianos

Royal Holloway, University of London ( email )

Horton Building
Department of Economics
Egham, Surrey TW20 0EX
United Kingdom

HOME PAGE: http://www.manolis-galenianos.org/

Rosalie Liccardo Pacula (Contact Author)

University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

635 Downey Way
Los Angeles, CA 90089-3333
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nicola Persico

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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