A Search-Theoretic Model of the Retail Market for Illicit Drugs

Abstract

A search-theoretic model of the retail market for illegal drugs is developed. Trade occurs in bilateral, potentially long-lived matches between sellers and buyers. Buyers incur search costs when experimenting with a new seller. Moral hazard is present because buyers learn purity only after a trade is made. This model is consistent with some new stylized facts about the drugs market, and it is informative for policy design. The effectiveness of different enforcement strategies is evaluated, including some novel ones that leverage the moral hazard present in the market.