Efficiency of purchasing and selling agents in markets with quality uncertainty: The case of illicit drug transactions

Efficiency of purchasing and selling agents in markets with quality uncertainty: The case of illicit drug transactions

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Article ID: iaor2013864
Volume: 226
Issue: 3
Start Page Number: 646
End Page Number: 657
Publication Date: May 2013
Journal: European Journal of Operational Research
Authors: , , ,
Keywords: drugs, market efficiency, France, frontier analysis
Abstract:

Since Akerlof’s theory of lemons, economists have viewed quality uncertainty as an informational advantage for sellers. Drawing on frontier techniques, we propose in this paper a simple method for measuring inefficiency of both sellers and buyers in markets for goods with different levels of quality. We apply a non‐parametric robust double‐frontier framework to the case of illicit substance markets, which suffer from imperfect information about drug quality for purchasers and to a lesser extent for sellers. We use unique data on cannabis and cocaine transactions collected in France that include information about price, quantity exchanged and purity. We find that transactional inefficiency does not really benefit either dealers or purchasers. Furthermore, information influences the performance of agents during market transactions.

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