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

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.

► Importance of information asymmetries in market transactions. ► Usual assumption: sellers hold informational advantage about products quality. ► We supposed here a “double” asymmetric information about product quality. ► We use a non-parametric double price-characteristics hedonic frontier. ► Efficiency depends on transaction context and favorable to experienced buyers.