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

  • Ben Lakhdar, Christian
  • Leleu, Hervé
  • Vaillant, Nicolas Gérard
  • Wolff, François-Charles

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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Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 226 (2013)
Issue (Month): 3 ()
Pages: 646-657

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Handle: RePEc:eee:ejores:v:226:y:2013:i:3:p:646-657
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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