Document de travail du LEM 2011-03 EFFICIENCY OF PURCHASING AND SELLING AGENTS IN MARKETS WITH QUALITY UNCERTAINTY: THE CASE OF ILLICIT DRUG

Since Akerlof’s theory of a market for lemons, economists have viewed quality uncertainty as an informational advantage for sellers. Drawing on frontier techniques, we propose in this paper a simple method to measure inefficiency of both sellers and buyers in markets for goods with different levels of quality. We apply our non-parametric double-frontier framework to the case of illicit substance markets, which suffer from imperfect information about the 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. Information influences the performance of agents during market transactions, sales in the street being more inefficient than sales made in other places.