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An Economic Analysis of a Drug-Selling Gang's Finances

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  • Steven D. Levitt
  • Sudhir Alladi Venkatesh

Abstract

We analyze a unique data set detailing the financial activities of a drug-selling street gang on a monthly basis over a four-year period in the recent past. The data, originally compiled by the gang leader to aid in managing the organization, contain detailed information on both the sources of revenues (e.g. drug sales, extortion) and expenditrues (e.g. costs of drugs sold, weapons, tribute to the central gang organization, wages paid to various levels of the gang). Street-level drug dealing appears to be less lucrative than is generally though. We estimate the average wage in the organization to rise from roughly $6 per hour to $11 per hour over the time period studied. The distribution of wages, however, is extremely skewed. Gang leaders earn far more than they could in the legitimate sector, but the actual street-level dealers appear to earn less than the minimum wage throughout most of our sample, in spite of the substantial risks associated with such activities (the annual violent death rate in our sample is 0.07), There is some evidence consistent both with compensating differentials and efficiency wages. The markup on drugs suggests that the gang has substantial local market power. Gang wars appear to have an important strategic component: violence on another gang's turf shifts demand away from that area. The gang we observe responds to such attacks by pricing below marginal cost, suggesting either economic punishment for the rival gang or the presence of switching for users that makes market share maintenance valuable. We investigate a range of alternative methods for estimating the willingness of gang members to accept risks of death, all of which suggest that the implicit value that gang members place on their own lives is very low.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6592.

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Date of creation: Jun 1998
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Publication status: published as Levitt, Steven D. and Sudhir Alladi Venkatesh. "An Economic Analysis Of A Drug-Selling Gang's Finances," Quarterly Journal of Economics, 2000, v115(3,Aug), 755-789.
Handle: RePEc:nbr:nberwo:6592

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  1. Michael, Steven C. & Moore, Hollie J., 1995. "Returns to franchising," Journal of Corporate Finance, Elsevier, Elsevier, vol. 2(1-2), pages 133-155, October.
  2. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 921-55, November.
  3. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  4. Glenn Ellison, 1994. "Theories of Cartel Stability and the Joint Executive Committee," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 37-57, Spring.
  5. Nagin, Daniel & Waldfogel, Joel, 1995. "The effects of criminality and conviction on the labor market status of young British offenders," International Review of Law and Economics, Elsevier, Elsevier, vol. 15(1), pages 109-126, January.
  6. Richard B. Freeman, 1991. "Crime and the Employment of Disadvantaged Youths," NBER Working Papers 3875, National Bureau of Economic Research, Inc.
  7. Grogger, Jeffrey, 1991. "Certainty vs. Severity of Punishment," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 29(2), pages 297-309, April.
  8. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  9. Lott, John R, Jr, 1992. "An Attempt at Measuring the Total Monetary Penalty from Drug Convictions: The Importance of an Individual's Reputation," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 21(1), pages 159-87, January.
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  1. The "Stone Cold" Economics of Professional Wrestling
    by Matthew E. Kahn in Environmental and Urban Economics on 2010-07-16 14:15:00
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