Shedding Light on the Dark: The Impact of Legal Enforcement on Darknet Transactions

48 Pages Posted: 29 Oct 2019 Last revised: 17 Mar 2020

See all articles by Jason Chan

Jason Chan

University of Minnesota - Twin Cities - Carlson School of Management

Shu He

University of Connecticut - Department of Operations & Information Management

Dandan Qiao

National University of Singapore (NUS)

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: September 30, 2019

Abstract

Darknet markets have been increasingly used for the transaction of illegal products and services in the last decade. In particular, it is estimated that drugs make up two-thirds of darknet market transactions. The growth of illicit transactions on darknet markets have led enforcement agencies to invest greater proportion of time and efforts to monitor and crack down on criminal activities on the darknet websites. Despite the successes in convicting perpetrators, it is unknown whether these policing efforts are truly effective in deterring future darknet transactions, given that the identities of the transacting parties are well protected by the markets’ features and that these participants may migrate to other darknet platforms to transact. To this end, this study attempts to empirically evaluate the susceptibility of darknet markets breaking down upon successful policing of participants on the platform. Using drug review data from three largest darknet markets, we rely on a difference-in-difference procedure to assess the impact of policing on future transaction levels, by contrasting various outcomes from the policed site with those from the non-policed sites. Our analyses found that enforcement efforts produce a negative effect on subsequent transactions on the policed site, for both vendors in the same country and in different countries as that of the arrested perpetrators. Not only do the average number of transactions per vendor decreased, we also found that the number of active vendors that remained on the site dropped significantly. This dampening effect cannot be explained by migratory behaviors, to which we interpret as evidence of a deterrence effect at work. Furthermore, we find heterogeneity effects in the enforcement effort, wherein small vendors and vendors with short site tenure are relatively more affected by the arrest shock. Study findings have policy and theoretical implications to law makers, enforcement agencies, and academicians.

Suggested Citation

Chan, Jason and He, Shu and Qiao, Dandan and Whinston, Andrew B., Shedding Light on the Dark: The Impact of Legal Enforcement on Darknet Transactions (September 30, 2019). NET Institute Working Paper No. 19-08, Available at SSRN: https://ssrn.com/abstract=3468426 or http://dx.doi.org/10.2139/ssrn.3468426

Jason Chan

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://carlsonschool.umn.edu/faculty/jason-chan

Shu He (Contact Author)

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Dandan Qiao

National University of Singapore (NUS) ( email )

13 computing drive
Singapore, 117591
Singapore

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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