Abstract
Retail prices of illicit drugs have fallen despite rising supply disruption. This article presents and empirically tests a model which may explain the price puzzle. Supply disruption increases the cost of purity. Illicit drugs are experience goods, with demand depending on the seller’s purity reputation. There is an equilibrium in which seizures decrease purity, reducing future demand and prices. These predictions are tested using monthly data for crack cocaine in Washington DC. Persistence of the series is exploited to handle endogeneity resulting from seizures mirroring supply. A 10% increase in seizures reduces purity by 4.7% and future prices by 2.3%.
Keywords
Illicit drugs; seizures; seller reputation;
JEL codes
- K14: Criminal Law
- L11: Production, Pricing, and Market Structure • Size Distribution of Firms
- L14: Transactional Relationships • Contracts and Reputation • Networks
Reference
Christiern Rose, “The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity”, TSE Working Paper, n. 16-643, April 2016.
See also
Published in
TSE Working Paper, n. 16-643, April 2016