Rose, Christiern (2016) The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity. TSE Working Paper, n. 16-643, Toulouse

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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%.

Item Type: Monograph (Working Paper)
Language: English
Date: April 2016
Place of Publication: Toulouse
Uncontrolled Keywords: Illicit drugs, seizures, seller reputation
JEL Classification: K14 - Criminal Law
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L14 - Transactional Relationships; Contracts and Reputation; Networks
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 30 Jun 2016 15:02
Last Modified: 18 Mar 2021 15:21
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