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Addiction and Illegal Markets

Author

Listed:
  • Shingo Ishiguro

    (Graduate School of Economics - Osaka University - Osaka University [Osaka])

  • Sultan Mehmood

    (New Economic School - New Economic School)

  • Avner Seror

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, AMU - Aix Marseille Université, CNRS - Centre National de la Recherche Scientifique)

  • Daniel Chen

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper studies dynamic contracts in illegal addictive markets where individuals' tastes for addictive goods develop through prolonged consumption and contract enforcement is limited. Our theoretical analysis uncovers the optimality of a 'freefirst-dose' strategy where sellers intensify buyers' addiction by offering consumption credit to newcomers. We show that buyers default a certain portion of the debts for early period consumption but are never imposed any penalty on the equilibrium path. This implies that illegal markets might favor non-violent interactions over violent ones, defying the stereotypical association of illegality with violence. Meanwhile, in illegal gambling markets, a distinct equilibrium phenomenon known as the long-shot bias emerges due to the influence of addiction, illustrating another complex dynamic within these markets. We discuss the implications of the model in the context of illegal sports wagering, narcotics, and religious sects.

Suggested Citation

  • Shingo Ishiguro & Sultan Mehmood & Avner Seror & Daniel Chen, 2024. "Addiction and Illegal Markets," Working Papers hal-04792970, HAL.
    • Handle: RePEc:hal:wpaper:hal-04792970
    Note: View the original document on HAL open archive server: https://hal.science/hal-04792970v1
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