A Quantitative Analysis of the Retail Market for Illicit Drugs ∗

@inproceedings{Galenianos2014AQA,
  title={A Quantitative Analysis of the Retail Market for Illicit Drugs ∗},
  author={Manolis Galenianos and Alessandro Gavazza},
  year={2014}
}
We estimate a model of illicit drugs markets using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs’ quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that sellers’ moral hazard reduces the average purity of drugs by… CONTINUE READING

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