"An Economic Analysis of a Drug-Selling Gang's Finances"
BY: STEVEN D. LEVITT
University of Chicago
American Bar Foundation
SUDHIR ALLADI VENKATESH
Harvard University
Paper ID: NBER Working Paper No. W6592
Date: June 1998
Contact: STEVEN D. LEVITT
Email: Mailto:slevitt at midway.uchicago.edu
Postal: University of Chicago
1126 East 59th Street
Chicago, IL 60637 USA
Phone: 773-834-1862
Fax: 773-702-8490
Co-Auth: SUDHIR ALLADI VENKATESH
Email: Mailto:venkates at fas.harvard.edu
Postal: Harvard University
78 Mount Auburn Street
Cambridge, MA 02138 USA
Paper Requests:
Full-Text Availability at http://www.nber.org/wwp.html Papers
can be downloaded online for $5. Hard copies are $10 plus
$10.00/order outside the USA. Prepayment required. NBER orders:
Mailto:orders at nber.org Checks, Mastercard, Visa and American
Express to 1050 Massachusetts Ave., Cambridge, MA 02138.
Phone:(617)868-3900. Fax:(617)349-3955. For NBER Subscriptions
Mailto:subs at nber.org or write to "Subscriptions" at address
above.
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 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