Forbidden Transactions and Black Markets Chenlin Gu,∗ Alvin E. Roth,y and Qingyun Wuzx Abstract Repugnant transactions are sometimes banned, but legal bans sometimes give rise to active black markets that are difficult if not impossible to extinguish. We explore a model in which the probability of extinguishing a black market depends on the extent to which its transactions are regarded as repugnant, as measured by the proportion of the population that disapproves of them, and the intensity of that repugnance, as measured by willingness to punish. Sufficiently repugnant markets can be extinguished with even mild punishments, while others are insuf- ficiently repugnant for this, and become exponentially more difficult to extinguish the larger they become. (JEL D47, K42, P16) Keywords: black market; repugnance; Markov process. 1 Introduction Why are drug dealers plentiful, but hitmen scarce? I.e. why is it relatively easy for a newcomer to the market to buy illegal drugs, but hard to hire a killer? Both of those transactions come with harsh criminal penalties, vigorously enforced: In the U.S., half of Federal prisoners have drug convictions,1 and murder for hire is treated ∗DMA, Ecole Normale Sup´erieure,PSL Research University, Paris 75230, France (email: chen-
[email protected]). yDepartment of Economics, Stanford University, Stanford, CA 94305, United States (email: al-
[email protected]). zDepartment of Economics, and Department of Management Science and Engineering, Stanford University, Stanford, CA 94305, United States (email:
[email protected]). xWe thank Itai Ashlagi, Fuhito Kojima, Jean-Christophe Mourrat, Muriel Niederle, Andrei Shleifer, Gavin Wright, Zeyu Zheng and Zhengyuan Zhou for helpful discussions.