Doug Henwood dhenwood at panix.com
Tue Aug 24 18:12:22 PDT 1999

[Levitt is busy!]

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


University of Chicago

American Bar Foundation


Harvard University

Paper ID: NBER Working Paper No. W6592

Date: June 1998


Email: Mailto:slevitt at midway.uchicago.edu

Postal: University of Chicago

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Email: Mailto:venkates at fas.harvard.edu

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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 expenditures (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 thought.

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.

JEL Classification: J31, J32

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