Price Formation in Illegal Markets: A Dynamical Approach

6 Pages Posted: 15 Feb 2018

See all articles by Erick Limas

Erick Limas

Free University of Berlin (FUB), Institute for Latin American Studies, School of Business & Economics

Date Written: February 4, 2018

Abstract

This paper introduces a dynamical extension to the theoretical framework proposed by Slim (2009), where the author analyzes price formation in illegal markets. We develop a simple model with two regimes that can show a rich variety of dynamic behaviors, such as cyclical or even chaotic fluctuations without needing changes in exogenous variables. It is important to note that this analysis does not use random shocks to introduce irregular fluctuations; these arise because of the presence of intrinsic forces associated with nonlinear relations. This model can provide intuitions to explain price changes in illegal markets, particularly in drug ones, where price dynamics can become unpredictable given both the dangerous environment and the unequal degree of trust between the participants in these markets.

Keywords: price formation, illegal markets, nonlinear relations, chaos

JEL Classification: C6, D4, D5, D8, K4

Suggested Citation

Limas, Erick, Price Formation in Illegal Markets: A Dynamical Approach (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3117888 or http://dx.doi.org/10.2139/ssrn.3117888

Erick Limas (Contact Author)

Free University of Berlin (FUB), Institute for Latin American Studies, School of Business & Economics ( email )

Boltzmannstrasse 20
Berlin, 14195
Germany

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