ANECONOMIC ANALYSIS OFADRUG-SELLING GANG’S FINANCES*

STEVEN D. LEVITT AND SUDHIR ALLADI VENKATESH

Weuse a uniquedata set detailing the Ž nancialactivities of a drug-selling streetgang toanalyze gang economics.On average,earnings in the gang are somewhatabove the legitimate labor market alternative. The enormous risks of drug selling,however ,morethan offset this small wage premium. Compensation withinthe gang ishighly skewed, and the prospect of futureriches, not current wages,is the primary economic motivation. The gang engagesin repeated gang wars andsometimes prices below marginal cost. Our resultssuggest that economic factorsalone are unlikely to adequately explain individual participation in the gang organg behavior.

Streetgangs havea longhistory in Americancities {Thrasher 1927}. Untilrecently ,gangs wereorganized primarily as social peergroups. Any economicactivities were of secondary impor- tance{Suttles 1968; Klein1995}. Thelast twodecades, however , havegiven rise to a dramatic transformationin streetgangs, or what Taylor{1990} termstheir ‘ ‘corporatization.’’ Whencrack becamewidely available in themid-1980s, sold in smallquantities in fragmentedstreet-corner markets, street gangs becamethe logicaldistributors. The potential proŽ t in drug dealing dwarfed that previouslyavailable togangs throughother criminal chan- nels.As aconsequence,gangs becamesystematically involved in thedistribution ofvarious narcotic substances including heroin and crack-cocaine{Block and Block1993}. Recentacademic literature on gangs has examinedsome aspects oftheirŽ nancial activities.Hagedorn {1988} and Padilla {1992} suggestthat gang memberspursue Ž nancial activitiesin responseto alienation from legitimate labor markets. Jankowski’ s {1991} study of37 gangs found that nearlyall ofthem had an expressedcommitment to illicit revenuegeneration, but that

*Wewould like to thank Autry Harrisonfor his assistance on the project, JonathanCaulkins, Philip Cook, Jeffrey Fagan, Richard Freeman,Herbert Gans, AlejandroGaviria, Edward Glaeser,Timothy Groseclose, Nicholas Harney ,Lewis Kornhauser,LanceLochner ,AnnePiehl, Ron Nobles, David Rothman, Catherine Wolfram,anonymous referees, and Lawrence Katz, aswell as numerous seminar participantsand anonymous informants for providing access to some of thedata. TheNational Science Foundation and the National Consortium for Violence Researchprovided Ž nancialsupport. Correspondence should be addressed to StevenLevitt, Department of Economics, University of Chicago, 1126 East 59th Street,Chicago, IL 60637.E-mail addresses: slevitt@midway .uchicago.edu; [email protected]. r 2000by thePresident and Fellowsof Harvard Collegeand theMassachusetts Institute of Technology. The Quarterly Journal ofEconomics, August 2000

755 756 QUARTERLY JOURNALOF ECONOMICS performancediffered accordingto various factors including organi- zational structureand communityrelations. Spergel {1995} has shownsigniŽ cant racial and ethnicdifferences in illegal entrepre- neurism.Akerlof and Yellen{1994} presenta modelanalyzing the relationshipbetween police enforcement against gangs and com- munitycooperation. 1 In spite ofthis pioneeringwork, however , manygaps in theliterature remain. Although quantitative data aresometimes used anecdotally ,thereis littlein theway of systematicdata collection.Virtually all oftheexisting scholarship is based onverbal reports by gang members,or in exceptional cases,direct observation of trafficking {Bourgois1989; Williams 1989}. Theillicit natureof gang activitiesand thelack of formal accountingprocedures have precluded moresystematic quantita- tiveanalysis priorto this study.Finally,manyof the studies reportthat gangs areembedded in citywide hierarchies,but they donot examine the impact ofthis organizationalstructure on a gang’s Žnancial dealings. Anumberof researchers have estimated the returns to crime {Freeman1992; Grogger1995; Viscusi 1996; Wilsonand Abra- hamse1992} and drug selling{Reuter, MacCoun, and Murphy 1990; Fagan 1992; Hagedorn1994} throughthe use of self- reports.2 Thereturns to drug sellingtend tobemuch greater than that ofother criminal activities, with frequentdrug sellers reportingmean annual incomesin therange of $20,000–$30,000. Studies relyingon ethnographicobservation, however, Ž ndmuch lowervalues for drug-related earnings,e.g., Bourgois {1995} and Padilla {1992}. Oneexplanation forthis discrepancy is that the self-reportand ethnographicstudies havefocused on very differ- entpopulations. The self-report studies havetended to survey independentdrug dealers,i.e., those with nogang affiliation, whereasethnographic research has focusedon low-levelmembers ofa hierarchy.Independents arelikely to have greater ability , experience,and accessto capital than ‘‘footsoldiers’ ’ whosit at the lowend of the street gang’ s organizationalhierarchy .Ourdata, whichspan thelevels of a gang hierarchy,fromrank-and-Ž le membersto imprisoned leaders, offer a partial solutionto this problem.Higher-level gang membersmay tend tohave similar characteristicsto independents. In contrastto the returns to crime, there has beenlittle

1.There is also a relatedliterature on organized crime (see, for instance, Reuter{1983} and Schelling {1984}). 2.See Fagan and Freeman {1999} for a surveyof thisliterature. ADRUG-SELLING GANG’S FINANCES 757 attentionpaid tothe ‘ ‘careerpath’ ’ ofgang members,market structure,organizational forms, competitive strategies, and how economicactivity is structuredin theabsence of legallyenforce- able contracts. 3 In this paper weare able todirectly analyze for theŽ rsttime a wide rangeof economicissues related to gangs and drug distribution.We do so through the use of auniquedata set containingdetailed Žnancial informationover a recentfour-year periodfor a now-defunct gang.These data weremaintained by the leaderof thegroup as amanagementtool for tracking the gang’ s Žnancial activitiesand formonitoring the behavior of gang members.Updated monthly,thedata includebreakdowns of costs and revenuesinto major components, as wellas informationon thedistribution ofproŽts as wagesto gang membersat different levelsof thehierarchy .Informationon bothprice and quantity is included.These Ž nancial data aresupplemented with informa- tionon thenumbers of violentdeaths, injuries, and arrestsof gang membersover this period,as wellas interviewsand observational analysis ofthe gang. While the data sufferfrom important limitationsand anumberof potential biases (which appear below),they nonetheless represent a substantial improvementon previouslyavailable information. Usingthese data, weanalyze theextent to which the indi- vidual and collectiveactions of gang participants canreasonably becharacterized as emanatingout of economic maximization. We address threedifferent issuesin this regard.First, we examine theeconomic returns to drug dealing relativeto legitimate labor marketactivities. The higher the returns to drug selling,the more likelyit is that theeconomic aspects ofthe gang areparamount. Wethen consider the causes and consequencesof gang wars. Finally,weanalyze therisk trade-offs madeby gang membersand whetherthese can be reconciled with optimizing decisionmaking. Anumberof insights emergefrom the paper .Street-level sellersappear toearn roughly the minimum wage. Earnings within thegang areenormously skewed, however, with high-level gang membersearning far morethan theirlegitimate market alternative.Thus, the primary economic motivation for low-level gang membersappears tobe the possibility ofrising up through thehierarchy ,as in thetournament model of Lazear and Rosen {1981}. Theaverage wage in thegang (taking intoaccount all

3.Southerland and Potter {1993} is anexception on thislast point. 758 QUARTERLY JOURNALOF ECONOMICS levelsof thehierarchy) is perhaps somewhatabove the available legitimatemarket alternatives, but notappreciably higher. Gang wars arecostly ,bothin termsof lost lives and lost proŽts. Almost all ofthedeaths ofdrug sellersare concentrated in war periods.Moreover, the violence keeps customers away .This negativeshock to demand is associatedwith afall of20– 30 percentin boththe price and quantity ofdrugs sold during Žghting,and thedrug operationbecomes far lessproŽ table. In spite ofthis, the gang discussed in this paper Žghts with rivals roughlyone-fourth of the time. Gang wars arealso an extremely costlymeans of dispute resolution,but giventhe absence of legally enforceableproperty rights and contracts,other means of resolv- ing conicts may be circumscribed. There is alsoevidence that frequentgang wars arethe result of an agencyproblem, namely thedesire of low-level gang membersto build areputationfor toughnessmay be in theirpersonal interest, but will almost assuredly becostly to thegang as awhole.We also document that thegang pricesbelow marginal cost during gang wars.Such pricing canbe reconciled with economicoptimization if mainte- nanceof market share is importantand thereare switching costs amongdrug purchasers{Klemperer 1995}, but maysimply reect awed decisionmaking. Finally,drug sellingis an extremelydangerous activity . Deathrates in thesample are 7 percentannually .Giventhe relativelylow economic returns to drug sellingnoted above, the implied willingnessto accept risk on thepart ofthe participants is ordersof magnitudehigher than is typically observedin valueof life calculations.This suggests either that gang membershave veryunusual preferences,that theex post realizationof death rateswas verydifferent than theex anteexpectation, systematic miscalculationof risk, or thepresence of importantnoneconomic considerations. Based onthese Ž ndings, weconclude that evenin this gang—one of themost economically sophisticated and successful gangs—the decision making of members is difficult (but not impossible)to reconcilewith that ofoptimizing economicagents. Certainly,economicconsiderations play an importantrole in the decisionsof membersand theactivities of thegang. However ,we Žnd that social/nonpecuniaryfactors are likely to play an impor- tant roleas well.Of course,all oftheseconclusions are based on theanalysis ofa singlegang’ s experience.The degree to which theseresults are broadly generalizableremains an openquestion. ADRUG-SELLING GANG’S FINANCES 759

Thestructure of the paper is as follows.Section I provides backgroundon thecommunity in whichthe gang is situated,the organizationalstructure of thegang, and thecompetitive environ- mentwithin whichit operates.Section II describesand summa- rizesthe data set.Section III analyzes theeconomic returns to drug sellingin thegang. Section IV examinesthe causes and consequencesof gang wars.Section V documentsthe dangers of drug sellingand thewillingness of gang membersto accept risk. SectionVI offersa briefset of conclusions.

I. THE GANG AND THE SOCIAL, ECONOMIC, AND COMPETITIVE ENVIRONMENTIN WHICH IT OPERATES The gang4 forwhich we have data is locatedin an inner-city neighborhoodin alarge,industrial Americancity . 5 Table I pro- vides socialand economicdata fromthe 1990 Censusof Popula- tionand Housingfor two census tracts representative of thosein whichthe gang operates,as wellas nationwideaverages for purposesof comparison. 6 Residents ofthearea are almost exclu- sivelyAfrican-American (over99 percent),as areall ofthe gang members.The labor market experiences of theresidents, particu- larly males,are far worsethan thosein theUnited States as a whole.Unemployment rates for males in 1990 wereover 35 percent—six timeshigher than thenational average.In addition, over40 percentof males were not in thelabor force. The female unemploymentrates are roughly half ofthemale unemployment rate.

4.There is some imprecision in our use of the term ‘ ‘gang’’ here.Among gang membersthemselves, the group weanalyze is termed a ‘‘set.’’ Asetis the small, geographicallyconcentrated unit around which local drug dealingis organized. A particularset is likelyto have affiliations with other sets in an overarching gang structure (e.g.,the Crips or the Bloods). In this paper we use the term gang rather thanset when referring to the small group weanalyze in orderto avoid confusion ofthemathematical and gang deŽnitions of the word ‘‘set.’’ Wewill use the term ‘‘organization’’ todenote the overall cooperative that encompasses the many geographicallylocalized units. 5.Throughout the paper we withhold precise details of the gang’ s location, identity,andthe exact time period examined in order to protect theanonymity of thosewho have provided us with the data. The data were obtained in the course of researchfor a multicitystudy ofgang activitiesinitiated by V enkateshin the mid-1980s. 6.The boundaries of the gang’ s turf donot closely conform with a single censustract. Thepart ofthe city inwhich the gang operates,however, is quite homogeneousalong socioeconomic lines. The census tracts wehave chosen are representativeof the gang’ s immediateneighborhood. The summary statistics presentedare population-weighted averages of the values for the two census tracts, exceptfor median family income, which is asimpleaverage. 760 QUARTERLY JOURNALOF ECONOMICS

TABLE I DEMOGRAPHIC, SOCIAL, AND ECONOMIC CHARACTERISTICSOF THE NEIGHBORHOOD

Gang’s census U. S. Variable tracts average

PercentBlack 99.6 12.0 Maleunemployment rate (percent) 35.8 6.5 Femaleunemployment rate (percent) 19.8 6.2 Percentof childrenin poverty 56.2 18.3 Percentof childrenin single-parentfamilies 77.6 21.5 Percentof childrenin familiesreceiving public assistance 60.3 12.3 Medianfamily income 15,07735,225 Educationalattainment (age 25 1 ) Lessthan high school 49.3 24.8 High school 28.7 30.0 Somecollege 17.4 24.9 Bachelor’s degreeor beyond 4.7 20.3 Percentowner-occupied housing 10.4 64.2 Percentof housingunits that are boarded up 15.3 0.4 Placeof residenceŽ veyears earlier (in percent) Same house 52.9 53.3 Differenthouse, same country 44.2 25.5 Differentcounty 2.9 21.3

All dataare from the 1990Census of Population and Housing, located atthe United StatesCensus web-site www.census.gov.The values in the Žrstcolumn report population weighted averagesfor the two census tractsin which the gang operates. For the variable median family income, asimple averageof the two medians is taken.Percent of children in single-parent families is calculated asthe fraction of children not living in afamily with married parents.

Children in theneighborhood experience high probabilities of adverseeconomic circumstances. Over half ofthe children were belowthe poverty line at thetime of the1990 census.More than three-quartersof all childrenlive in single-parent families,and 60 percentare in familiesthat receivepublic assistance. Median family incomeis $15,077 annually,lessthan half of thenational average.A smallfraction of thecensus tract is public housing,although the immediate neighborhood in whichthe gang operatesdoes not include any large-scalepublic-housing com- plexes.Roughly half ofadults in thecommunity do not have a high-schooldiploma. Only onein twentyresidents has adegree froma four-yearcollege, compared with onein ŽveAmericans generally. Astrikingfeature of the mobility patterns amongneighbor- hoodresidents is therarity with whichoutsiders move into the neighborhood.Although there is movementwithin thecounty ,less ADRUG-SELLING GANG’S FINANCES 761

FIGURE I OrganizationalStructure than 3percentof the1990 residentslived outsideof thecounty in 1985. Forthe United States as awhole,residents were seven timesmore likely to have moved to their current home from outsideof the county .Thenumber of residents in theneighbor- hoodin 1990 is lessthan half thenumber in 1950. Theorganizational structure of thegang as awholeis shown in FigureI. Weuse the titles used by thegang, except where those titleswould revealthe gang’ s identity.Thestructure of the organizationis simplecompared with mostŽ rmsof comparable size(see, for example, Baker ,Gibbs, and Holmstrom{1994}). The top-levelof theorganization is madeup ofwhat webroadly denote the‘ ‘centralleadership.’ ’ Thisbody is chairedby fourto six individuals with responsibilityfor devising thelong-term strate- 762 QUARTERLY JOURNALOF ECONOMICS giesof themultistate organization, and maintaining relationships with suppliers and affiliates in otherregions of the country .The centralleadership alsoincludes approximately twelve persons whoare responsible for collecting dues, overseeing recruitment of newmembers, allocating punishments,and servingas liaisonsto thecommunity . 7 Roughlyone-third of these leaders are impris- onedat any giventime. The nexttier in theorganization is agroup of‘ ‘localgang leaders’’ with speciŽc territorialresponsibility for oneormorelocalized gang.In theorganization we study ,thereare roughly100 ofsuchgang leaders.Reporting in toeach gang leader arethree ‘ ‘officers.’’ The‘ ‘enforcer’’is responsiblefor ensuring the safety ofgroup members, the ‘ ‘treasurer’’managesthe liquid assetsof the group, and the‘ ‘runner’’ performsthe risky task of transportinglarge quantities ofdrugs and moneyto and fromthe supplier.Reportingto the enforcer are the ‘ ‘footsoldiers’ ’ who serveas street-leveldrug sellersand fromwhose ranks future officersand leadersarise. Foot soldiers are typically 16–22 years ofage, although potentially mucholder .At theperiphery of the gang is a‘‘rank-and-Žle’ ’ memberpool who span all ages(the age rangein thegroup we study is14 to40) and whohave little formal responsibilityfor drug selling.Rank and Žle,unlike foot soldiers and highergang members,pay duesto the gang, in return receivingprotection, status, and areliablesupply ofdrugs for thosewho deal independently. 8 Thestructure of the overall organization is similarto that ofa franchised company.Gang leaderspay afeeto the franchisers (centralleadership), but arethe residual claimants ontheproŽ ts accruingto their franchise. In returnfor those tribute payments, higher-rankingleaders ensure that alocalgang has sufficient protection(both ontheirturf and in prison),stable allianceswith othergang setssuch that gang memberscan travelto other areas ofthe city with relativesafety ,accessto reliable sources of wholesaledrugs, and thepossibility formembers to rise up the hierarchyinto the upper echelon,where personal revenue and powerare considerably enhanced. The individual, localgang units,like separate franchise owners, have relatively little interac- tionwith oneanother .

7.Within the organization, a cleardistinction is made between those perform- ingthe two differentfunctions of the central leadership. We ignore these differenceshere because they are not material to the analysis we perform. 8.Rank andŽ lewho deal drugs wouldnot do so on the gang’ s ownturf (withoutrisk ofseriouspunishment), but rather might sell in otherneighborhoods, attheirworkplace in the legitimate sector, or at school. ADRUG-SELLING GANG’S FINANCES 763

FIGURE II TheGeographic and Competitive Landscape of theGang

Thedata that wehave are for just one gang within thelarger organizationalstructure. That gang is overseenby alocalgang leader,and has oneenforcer, one treasurer ,and onerunner at any givenpoint in time.The number of foot soldiers ranges between 25 and 75 overthe period examined, and thereare 60 to200 rankand Žle.At any givenpoint in time,roughly one-fourth of the males aged 16–22 in theneighborhood are foot soldiers. Thegeographic and competitivelandscape in whichthe gang operatesis detailed in FigureII. Thisgang’ s turf formost of the timeperiod examined is atwelve-squareblock area bordered by majorthoroughfares on all sides.Most of the drug-dealing is conductedalong the edges of the territory on or near one of the majorstreets. The gang sellsperhaps 30 percentof thedrugs to thoseliving within thetwelve-block area— most of theremaining purchaserscome from a relativelylimited geographic range. In this particular area,few buyers come from the suburbs. Theareasto the immediate north and southof this gang’s turf arecontrolled by separate,rival gangs.The time period for which 764 QUARTERLY JOURNALOF ECONOMICS wehavedata is punctuated by aseriesof violentcon icts between thegroup we study and therivals tothe north, culminating with theeventual seizure of the rival group’s turf,a twelve-square blockarea, in thelatter part ofour sample period. Although relationswith thegang tothe south have historically been quite hostile,there were no majorcon icts betweenthese two groups in theyears for which we have data. Tothewest of this groupis territorycontrolled by anothergang ofthe same organizational affiliation. Totheeast are residential tracts similar in demo- graphic makeup,but with somewhathigher socioeconomic status and neighborhoodcohesion. The area to the east has markedly lowergang and drug activity throughoutthe sample.

II. DATA AND DESCRIPTIVE STATISTICS Thedata setcontains detailed Žnancial informationon the activitiesof the gang describedabove on a monthlybasis fora recentfour-year period. The data wereoriginally maintained by theleader in controlof the gang, and theywere updated each monthby theenforcer, who compiled the information by hand. Thedata endabruptly with thearrest of thegang leaderand other officers.Shortly thereafter ,thegang, weakened by thesearrests and besetby inŽghting, was overpoweredby rivals,its turf divided betweenenemy gangs. The gang westudy is nolongerin operation.Most of the former gang membershave since aban- doneddrug dealing.The person who supplied usthe data is a formergang memberwith tiesto the gang that trackedthe data (although hewas notnecessarily directly affiliated with this particular group).Our informant, after serving a prisonsentence, nowholds afull-time jobin thelegitimate sector .Forobvious reasons,we haveaccommodated his requestto remain anonymous. Giventhe unusual natureof the data, it is importantto considerboth its reliability and thedegree to which it is represen- tativeof gangs moregenerally .On themost basic questionof authenticity,wehave no reason to doubt that thedata actually representthe Ž nancial recordsof thegang. In termsof understand- ing thepossible biases inthedata, it is worthnoting that it served twopurposes: (1) atoolfor managing the day-to-day operationsof thegang, much as aCEO relieson management information systems(MIS) data in aŽrm,and (2) ameansof tracking operationsfor reporting to higher levels in thegang hierarchy. TheŽ rstpurpose suggests that theintention of thedata keepers ADRUG-SELLING GANG’S FINANCES 765 was toaccurately capture the gang’ s Žnances,although their ability todo so effectively may be subject to question.The second useof the data, however,raises the concern that thescale of operationsand proŽtability ofthe enterprise are systematically understated sincehigh proŽts arelikely to lead togreater demands fortribute from the gang leadership. Althoughthe source of the data assuresus that is notthe case,we nonetheless believe that it is prudent toview the revenue and proŽts as lowerbounds onthe true values for two reasons. First,the gang leaderhad substantial powerto make Ž nancial arrangements‘ ‘off thebooks.’ ’ Forinstance,during thetime period examinedthe gang leaderreceived an unknownamount of compensationfrom nongang members in returnfor the right to sellheroin on the gang’ s turf.This income is notrecorded in our data set.Second, the revenue reported re ects only that obtained by thegang, missing that fractionof the proceeds which is appropriated by gang members,either for their own use or for resale.While usage of crack by gang membersappears tobelow (it is stronglydiscouraged by gang leaders),a nonnegligiblefraction ofthedrugs/ drug revenuesappear tobe pilfered by thelow-level gang members. 9 Wedo not have a goodmeasure of the extent of suchactivities, but estimatethat at most15 percentof the revenuesare skimmed by thoseselling the drugs. 10 Thedata containmonthly breakdowns of themajor sources of revenuesand expendituresfor the gang. Table II presentsmonthly averagesfor each of the four years covered. Of the48 months spanned byoursample, six monthsof data aremissing. 11 Averages arecalculated based onlyon those months for which data are available. All dollar valuesare converted into 1995 dollars using

9.This pilfering takes a numberof different forms. First, those who are responsiblefor putting the crack intobags for sale on thestreet report that they routinelykept someportion for themselves. It was also common practice for street-levelsellers to examine the bags of crack theyare responsible for selling, removingsome of thecrack fromthe bags with the largest quantity .Finally,sellers attemptedto engage in pricegouging when buyers are suspected of beingnaive. Excessproceeds from sales made at anin ated price were unlikely to be reported back tothe gang enforcer.Whileall of these activities were technically against gang rules,and were sometimes punished by violentbeatings, it appears that they werenonetheless commonplace. 10.We base this estimate of 15 percent on conversations with a numberof formergang members,although we have no good means of verifying this magnitude.At mostone-third of this skimming would be for personal consumption, withthe remainder either unreported proŽ ts or theremoval of some of thecrack forlater resale. 11.Data for December are missing in three of thefour years and represent halfof themissing data in thesample. According toour source, December is a slow monthfor drug sales. 766 QUARTERLY JOURNALOF ECONOMICS

TABLE II GANG FINANCES BY YEAR MonthlyAverages in 1995 Dollars

Category Year1 Year2Year3 Year4

Totalrevenues 18,50025,600 32,000 68,400 Drug sales 11,90019,100 24,800 53,000 Dues 5,4005,200 5,100 9,600 Extortionarytaxes 1,2001,300 2,100 5,800 Totalnonwage costs 8,10011,600 14,000 25,200 Costof drugs sold 2,8004,000 5,000 11,900 Tributeto gang hierarchy 3,2004,400 5,000 6,000 MercenaryŽ ghters 1,0001,000 1,300 1,200 Funerals/paymentsto families of the deceased 300 1,200 0a 1,100 Weapons 300 400 300a 1,800 Miscellaneousexpenses 500800 2,400 a 3,200 Totalgang wages 6,2008,000 9,500 32,300 Officers 2,6002,600 2,100 3,300 Footsoldiers 3,6005,400 7,400 29,000 NetproŽ t accruing toleader 4,2006,000 8,500 10,900 Monthlywage per foot soldier 140 200 180 470 Priceand quantity of drugs sold: Quantity 1,3102,054 3,109 7,931 Price 8.649.18 8.00 6.69

Datain the tablere ect monthly averagesfor the year listed atthe topof the table.Values are basedon monthly datafor the four-year period. Dataare unavailable for 6of the 48monthsin the sample, with yearly averagesbased only onthosemonths with data.Dollar values have been converted into 1995dollars using the GDPdeator. All values are rounded tothe nearesthundred dollars. Estimatesinclude only revenue sources included in official gang records. The units on quantityare number of ‘‘bags,’’ anartiŽcial unit of measurethat roughly matchesthe number of drug transactions thattake place. The price is aprice per ‘‘bag.’’ a.Detailed information on the breakdown ofsomecost categories is unavailable for Žve monthsof year 3; all such costsare allocated tothe category ‘‘miscellaneous.’’

theGDP deator .Revenuesare broken down intothree sources: proceedsfrom drug sales(almost exclusively crack-cocaine), dues fromgang members,and ‘‘streettaxes,’ ’ i.e.,money extorted from individuals (and occasionallycompanies) conducting business on thegang’ s turf.Examples ofthose required to pay streettaxes would includegrocery store owners, gypsy cabs,people selling stolengoods, and thoseproviding servicessuch as autoor plumbing repair.Averagemonthly revenue from all sourcesfor thegang rosefrom $18,500 to$68,400 overthe period examined. As notedabove, these revenues are best viewed as alowerbound onthetrue Ž gures.Proceeds from the sale of crackare the gang’ s majorsource of income, and growthin drug salesaccounts for virtually all ofthe increase in revenueover time. Dues collected ADRUG-SELLING GANG’S FINANCES 767 fromgang membersare nearly constant until theŽ nal year,when thegang membershipexpands dramatically with theexpanded turf.It is importantto note that in this gang,core gang members (i.e.,officers and footsoldiers) were not required to pay dues.Only theperipheral members of thegang (i.e.,rank and Žle)paid these fees.12 Althoughthe revenue numbers may appear low,‘‘back-of-the- envelope’’ calculationssuggest that theyare reasonable. Using theserevenue Ž guresand averagedollars persale of $10, we estimatethat thenumber of salesper hour by adrug-selling team rangesfrom Ž vetotwelve over the sample. That frequency of sale is consistentwith self-reportsof theparticipants as wellas recent observationaldata wehavecollected in similarneighborhoods. In theoriginal data, thenonwage costs are broken down into six categories:costs of drugs sold,payments to higher levels of the gang,weapons, payments to mercenary Ž ghters(nongang mem- berswho are hired for short periods of timeto help Žght in gang wars), funeralcosts and paymentsto familiesof thedeceased, and miscellaneousexpenses. 13 Thegreatest nonwage expenditure of the gang was the regulartribute payment to higher levels of the gang. Such paymentsamount to almost20 percentof totalrevenues. Expendi- turesrelated to drugs comprisethe next largest nonwage cost component,accounting for 15 percentof totalrevenue, and almost 25 percentof drug sales.The price paid by thegang toobtain powdercocaine, which is subsequentlytransformed into crack by thegang forresale on thestreet, declines roughly 35 percentover thesample period, re ecting a citywide declinein theprice of bulk cocaine.Surprisingly ,thereappears tobesubstantial imprecision in themeasurements used in thesebulk drug transactions. Standard units suchas kilogramsand pounds arenot used by the gang (although thesupplier doesuse such units). Quantities instead describedin various‘ ‘street’’ units that weare able toonly roughlytranslate into kilograms. 14 Thus,we report our results in an artiŽcial unit (‘‘bags’’ )that approximatesthe standard quan-

12.This dues structure isunusual. Typically all gang memberspay dues.The valueof the dues that foot soldiers avoid could be consideredas income.Average dues,however ,areonly about $50 per month, so the basic conclusions are unchanged. 13.Included in miscellaneous expenses are costs for parties, community eventsorganized by the gang, lawyers’ fees, bribes, etc. 14.For instance, the gang wouldpay roughly $1500 for the quantity of cocainethat Ž tsin a ziploc-typesandwich holder . 768 QUARTERLY JOURNALOF ECONOMICS tity in whichstreet sales occur ,ratherthan in kilograms.While this choiceof units is essentiallyarbitrary ,it has theattractive featureof roughlycapturing thenumber of salesmade by thegang in amonth.A bag containsan extremelysmall quantity of crack-cocaine(e.g., a few pebbles) and typically sellsfor about $10 onthestreet. By ourcalculations, between 10,000 and 15,000 bags can beproduced fromone kilogram of powder cocaine, making the streetvalue of a kilogramof pure cocaine converted into crack between$100,000 and $150,000. Informationabout relative prices and quantities arepre- sentedin thebottom panel ofTableII. Thequantity sold risesover theperiod examined, especially in theŽ nal yearafter the gang expanded its turf.Price initially rises,but falls in theŽ nal year. Theriseand subsequentfall in pricesin ourdata roughlymatches thecity-level street price estimates based ondata collectedby the DrugEnforcement Agency in theSTRIDE database and analyzed in Abt {1997}. Betweenyears 1 and 2,Abt {1997} reportsa 13 percentincrease in citywide crackprices, compared with 6percent forthis gang. 15 Fromyears 2 to4, the city price of crackfalls 40 percent,compared with 27 percentfor the gang weanalyze.Note that thedeviations between the prices charged by ourgang and overallcity prices are consistent with astoryin whichŽ ghting in theearly part ofthe period depresses prices. Increased local marketpower due to the gang doubling its turf allows thegang to chargea higherprice in thelatter part ofthe period, a topicwe will returnto later in thepaper . Anotherimportant expenditure item is formercenary Ž ght- ersknown as ‘‘warriors’’ whomthe gang hireson aretainerbasis toŽ ght in wars.Fees for warriors are roughly $2000 perperson permonth of service. The warriors have various duties including guarding areaswhere drugs aresold, occupying front-line posi- tionson the gang’ s turf,and performingdrive-by shootings.The useof hiredwarriors declines at theend of thesample as thegang increasinglychose to use internal resources (foot soldiers) for Žghting ratherthan contracting-outthis task.This decision on thepart ofthegang appears tobe linkedin part toits difficulty in controllingthe expanded turf,over which the gang had no inherentlegitimacy .Theoriginal territory was mucheasier to defend becausethe gang’ s rootswere in theiroriginal neighbor-

15.The prices we report from Abt {1997}are the real price per unit of pure cocainepurchased in quantitiessmaller than an ounce in thecity wherethe group westudy islocated. ADRUG-SELLING GANG’S FINANCES 769 hoodand the‘ ‘original’’ gang memberscontinued to residethere. Furthermore,prior to expansion, all ofthe gang violenceinvolved thegang tothe north. After thetakeover ,thegang’ s enemies increasein number,leading toa risein thebaseline frequency of violencewhen discrete wars arenot taking place.Consequently , developingthis Žghting expertisewithin theorganization became morevaluable. Funeralsand relatedexpenses such as compensatingvictims’ familiesare costly to the gang. Typically ,fora footsoldier who is killed,the gang pays $5000, orapproximately three years of foot-soldierwages, to his family forcompensation and funeral services.Such payments are viewed as extremelyimportant by thegang leaders,both to maintain communitysupport forthe gang and, becausein thewords of one gang leader,‘‘You got to respectfamily. ’’16 Interestingly,whenthe gang expanded, mem- bersconscripted from the former rival outŽt weretreated much lessgenerously than werethose who belonged to the original gang. Thepurchaseof weapons,at acostof $300–$400 permonth, is initially arelativelysmall componentof gang costs.Expenditure onweapons increases dramatically in theŽ nal year,bothdue to increasedŽ ghting,and becausethe gang reducedits relianceon outsidewarriors, choosing instead todefend itself.Combined with miscellaneousexpenses, all ofthese nonwage costs total to just lessthan 50 percentof revenues. Theremainder of the revenues are distributed as wagesto gang members,or areretained by thegang leaderas proŽts. The earningsof thegang membersinvolved with drug distribution is thefocus of thenext section.

III. THE ECONOMIC RETURNS TO DRUG SELLING INTHE GANG In this sectionwe attempt to measure the economic return to sellingdrugs in thegang. We begin with the‘ ‘official’’ data reportedin thegang’ s books.Later ,weincorporate ‘ ‘off-the-books’’ sourcesof incomeas well. Anindividual’s rankwithin thegang is ofcriticalimportance forhis personalremuneration. The local gang leaderis the

16.We have consciously chosen to leave participant quotes in a raw formin orderto provide as accurate a reection of their statements as possible. Conse- quently,wehave made no attempt to eliminate misstatements, profanity ,and colloquialismsthat typically would be edited out. 770 QUARTERLY JOURNALOF ECONOMICS residual claimanton drug proŽts. As shownin TableII, thegang leaderretains between $4,200 and $10,900 amonthas proŽt, for anannual wageof $50,000–130,000. Thisvalue is wellabove what leaderscould hope to earn in thelegitimate sector given their educationand workexperience. For instance, a formerleader of a rival gang is nowemployed in thelegitimate sector at anannual salary of$16,000. His legitimatesector wage may be lower than it otherwisewould havebeen, however ,dueto his interveningyears spent in prison{Lott 1992; Naginand Waldfogel1995}. Theofficers each earn roughly $1000 permonth. This wage is relativelyconstant, although in war periodsreductions some- timesoccur .Thesetasks aregenerally full-time jobs(in thesense that thepeople who perform them would beunlikely to be concurrentlyemployed in thelegitimate sector ,althoughthey maynot strictly involve 40 hoursof workper week). The standard ofliving associatedwith holding thesejobs is onlyslightly higher than afull-time minimumwage job. Thisgang is unusual in that footsoldiers for the most part receiveda at wage.Compensation was notdirectly linked to the volumeof sales. 17 Theirwage depended bothon the number of shifts in whichthey distributed crackand ontheirposition within theirdrug-selling team.Crack was sold in teamsof six foot soldiers,with ateamleader ,acarrierwho delivers the goods, two laborerswho package the goods, make change, etc., and alookout. Wageswere highest for the team leader and lowestfor the lookout whois typically an entrylevel foot soldier . Ourmonthly data, however,arenot broken down tothat level ofdetail. Theonly information we have is totalwages paid toall footsoldiers in amonth.Based onŽeld notesrecorded at thetime, wehavea reasonablyaccurate assessment of thenumber of shifts that weretaking place,other gang-related activitiesthat required theparticipation offoot soldiers, and thenumber of active foot soldiers.By combiningthis informationwith totalfoot-soldier wages,we areable toconstruct estimates of monthlyearnings per footsoldier and an hourlywage. It is importantto recognize that imprecisionin all ofthese measuresintroduces uncertainty into our wage and earnings estimates.While not perfectly accurate, we aremost conŽ dent in ourŽ gureson ‘ ‘official’’ monthlyearnings per foot soldier .As

17.In many other gangs, earnings of street-levelsellers are closely tied to the numberof salesthrough a commissionstructure. ADRUG-SELLING GANG’S FINANCES 771 discussed earlier,however ,thereare also ‘ ‘off-the-books’’ sources ofincome that areexcluded from the gang’ s accountingdata. Hourlywage determinations are subject to greater uncertainty , bothbecause of possible inaccuracies in ourestimates of the numberof shifts performedand dueto the inherent ambiguity in determiningwhether some gang-related activities(e.g., gang meetings,attending functionsas amemberof the local leaders entourage)should beclassiŽ ed as workor leisure. Official monthlypayments to each foot soldier are low: only $200 permonth or lessuntil theŽ nal year.Based onobservation and discussionwith thegang leader,we estimate that thetypical footsoldier worked four four-hour shifts perweek selling drugs, and performedapproximately four hours of other tasks for the gang,for a totalof twentyhours of workper week. Hours worked perperson appear tohave stayed relativelyconstant over time. Theincreased demand forlabor by thegang was accomplished throughan expansionof the number of foot soldiers from approxi- mately25 at thebeginning of thetime period to over 60 in theŽ nal year.Based onthese estimates of hoursworked, the hourly wage earnedby thetypical footsoldier was belowthe federal minimum wage. Whilethese foot-soldier wages are strikingly low ,thereare boththeoretical arguments and corroboratingempirical evidence in support ofthesenumbers. 18 Froma theoreticalperspective, it is hardly surprising that foot-soldierwages would below given the minimalskill requirements for the job and thepresence of a ‘‘reservearmy’ ’ ofpotentialreplacements among the rank and Žle. Similar featuresare observed in othergang casestudies {Bourgois 1995; Padilla 1992}. Empirically,thebehavior of thefoot soldiers suggeststhat theyare not well off Žnancially.First,gang mem- bersbelow the level of gang leaderslive with family becausethey cannotafford tomaintain aseparateresidence. Second, many foot soldiersalso hold low-paying jobsin thelegitimate sector, typi- cally workingas service-sectoremployees in shopping mallsand fast-food restaurants,performing physical laborsuch as demoli- tion,or working in smalllocal businesses like dry cleanersor grocerystores. We estimate that 75–80 percentof thefoot soldiers areemployed in thelegitimate sector at somepoint overthe

18.Data manipulation on the part ofgang record-keeperscannot explain theselow wages. If thegang wereusing the records to convince the central gang thatthey could not afford to pay additionalmoney in tribute, we would expect foot-soldierwages to be systematicallyexaggerated rather than understated. 772 QUARTERLY JOURNALOF ECONOMICS courseof a year.Jobtenure, however, is generallyquite low ,so that perhaps only40– 50 percentof the foot soldiers are employed in thelegitimate sector at any givenpoint in time(see also Hagedorn{1994}). 19 Previousresearch suggests that evenamong well-paid drug sellers{Fagan 1992; Reuter,MacCoun,and Mur- phy 1990)}, morethan 25 percentparticipate in thelegitimate economy.Thehigher numbers we obtain forlegitimate labor marketparticipation areconsistent with thelower drug-related earningsof thefoot soldiers in oursample. If thereis oneoverriding puzzle in thedata, it is thefact that foot-soldierwages rise dramatically in theŽ nal yearof thedata, morethan doubling to$470 permonth. There are a numberof potentialexplanations forthis phenomenon.One possible reason isthat footsoldiers assume more of theresponsibility for defend- ing thegang’ s turf,which carries great risk for which they must be compensated(as will beshown later ,therisk of death almost doublesin theŽ nal year).Second, the gang leaderbecomes a memberof thegang’ s centralleadership (theelite group of sixteen whooversee the entire organization). This dramatically limitsthe amountof time he is able tospend monitoringthis particular group,perhaps providing an incentiveto pay efficiencywages. Third,efficiency wages may also serve the purpose of ensuringthe loyaltyof this group,especially the newly incorporated foot soldierswho were formerly members of therival gang.Maintain- ing controlof this turf is criticalto the gang leader’sability to remainas amemberof the central leadership, a positionthat allows himto extort nearly $200,000 annually fromother gangs acrossthe city . 20 Whilewe were unable to ask the gang leader himselfwhy foot-soldierwages increased so much, we asked anotherformer leader familiar with thesituation what his

19.There is some anecdotal evidence that legitimate labor market participa- tionresponds to changing wages in the drug trade.For instance, a formerfoot soldierdescribes his past labor market behavior in the following way: ‘‘Well,once, whenI wasstarting out slinging {selling drugs}, wetook over another building and we,well really just me and Rock, wehad the whole place. But, evenwhen everybodywas in there, we were making like two times a monthwhat wewas gettingbefore. Its not a lotof money,butif you start gettingmore money from {the officersof thegang}, you get into your head that you don’ t needno otherwork. SoI quit{my job at a fast-foodrestaurant}. But Iwentback andgot the job I quitat, ‘causeslinging wasn’ t bringingme no money after a while,you know ,too dangerousand s---.’ ’ Unfortunately,ourdata on legitimate labor market participa- tionare not detailed enough to examine this issue more systematically . 20.Another possible explanation for the increased monthly wage would be an increasein hours worked. Thatdoes not appear to be thecase, however . ADRUG-SELLING GANG’S FINANCES 773 explanation was.His answer suggested that manyof the argu- mentsmentioned above may be part ofthestory:

Youneverforget the n------that got you where you are. Y oualwaysgot to treatthem good ‘ causeyou never know whenyou need them. That n----- {the gang leaderwho took over another territory} don’t know ifhecan trust {his newfoot soldiers} yet, so he gotta be realcareful. If hedon’ t takecare of his ownboys, he ain’ t gonnabe up there {in the central gang leadership}very long,so he pays them real nice, you know .Hejusthas to cause n----- got all thesefolks under him. It ain’ t easyto watch allthem, so yougotta make sure theyon yourside. Giventhe enormous gap betweenthe wages of the foot soldiersand thosehigher up in thegang, the most reasonable way toviewthe economic aspects ofthedecision to join the gang is as a tournament,i.e., a situationin whichparticipants viefor large awards that onlya smallfraction will eventuallyobtain {Lazear and Rosen1981}. Gang membersthemselves appear tobekeenly awareof this, as evidencedby thefollowing quote from a foot soldier:‘ ‘YouthinkI wanta beselling drugs onthestreet my whole life?No way.But Iknowthese n------{aboveme} are making more money,and it’s like,people don’ t last longdoing this s---. Soyou know,IŽgureI gota chanceto move up. But ifnot,s---, Igetme a jobdoin’ something else.’ ’ TableIII presentsempirical documentation of the tourna- mentaspects ofgang participation. If gang membersare risk neutral,then the average wage in theorganization captures the expectedreturn to gang participation. 21 Forcomparative pur- poses,observed hourly wages for the gang leaderand footsoldiers arealso presented. These rough estimates of averagewages in the organizationare based ona numberof assumptions. First, it is assumedthat thegang westudy is representativeof theroughly 100 locallybased gangs that fall underthe umbrella of the extendedgang network,both in termsof numberof membersand thetribute paid tothe central leadership. 22 Wefurther assume that 75 percentof the tribute paid tothecentral gang organization is proŽt (theother 25 percentcovering various operating costs). Finally,weassume that theperceived likelihood of risingto each levelof the gang is givenby static expectationsbased onthe

21.Of course,any particular individual’ s expectedreturn willdepend on his orherability and effort. In atournamentcontext, the expected return (aswell as, bydeŽnition, the actual return) maybe very skewed. 22.After thegang westudy expandsits turf inyear 3, we treat it as if it representstwo ofthe 100 locally operating gangs. 774 QUARTERLY JOURNALOF ECONOMICS

TABLE III GANG PARTICIPATION ASA TOURNAMENT

Estimatedhourly wage including Estimatedhourly wage including both onlyofficial income sources officialand unofficial income sources

Averagewage Gang Foot Averagewage Gang Foot for all gang leader soldier for all gang leader soldier members wage wage members wage wage

Year1 $4.80$25.20 $1.70 $ 5.90 $32.30$2.50 Year2 $5.90$36.00 $2.40 $ 7.40 $47.50$3.70 Year3 $5.60$51.00 $2.20 $ 7.10 $65.90$3.30 Year4 $8.70$65.40 $5.60 $11.10 $97.20$7.10

Estimatesin the Žrstthree columns are basedon the datareported in TableII. Estimatesin the lastthree columns attemptto correct for possible underreporting ofincome due toeither theftor ‘‘off-book’’ transactions. We assumethat 10 percent of the value of drug salesis obtained ‘‘off-book’’ bythe gang leader and that15 percent ofthe value of drug salesis appropriated bythe footsoldiers. We assume20 hours aweek of work by footsoldiers, and 40hours aweek bythe gang leader and other gang officers. In addition, we assumethat this gang is typical ofthe roughly 100gangs operating within the larger organizational structure bothin termsof tribute paid tothe central leadership and with respect tothe probability of advancement tothe central leadership. The averagewage for the organization asawhole includes the proŽt component of paymentsto the central leadership (assumedto be 75percent of the overall tribute). All dollar values are in 1995dollars. compositionof the current hierarchy in whichthere are roughly 3000 footsoldiers, 300 officers,100 localleaders, and 16 central gang leaders. Columns1– 3 presentaverage wages under the assumption that theofficial data fully capturethe wages and proŽts tothe organization.Columns 4– 6 adjust theofficial data underthe assumptionthat thegang leaderfails toreport 10 percentof drug revenuesand thefoot soldiers skim an additional 15 percent. Focusingon that secondset of estimates,which we believe to be morerepresentative, the average wage in theorganization ranges from$5.90– $11.10 during thesample period. This value is above legitimatemarket wages available tothe foot soldiers, who, as poorlyeducated inner-city youths, are unlikely to earn much more than theminimum wage. 23 As discussed later,however, the wage premiumearned by gang membersis quitesmall given the enormousrisks associated with sellingdrugs. TableIII demonstratesthe enormous skew in thedistribution ofwages within thegang. The gang leaderearns 10– 20 times morethan theaverage foot soldier .Whilethis earningsgap is small comparedwith frequentlycited numbers about CEO pay

23.Note also that upward mobilitywithin the gang occurs muchmore quickly thanin theformal sector .Asuccessfulgang membermay become a localleader by hisearly- to midtwenties. ADRUG-SELLING GANG’S FINANCES 775

(e.g.,Reingold {1997}), it should benotedthat thegang leaderto whomwe refer has onlya fewhundred employees,and is two levelsin thehierarchy below those who run the gang organiza- tion.More directly comparable are the data onfranchiseowners who,like gang leaders,put upcapital and areresidual claimants onaccumulated proŽ ts. Michael and Moore{1995} reportthat franchiseowners receive slightly over$100,000 (in 1995 dollars) in operatingincome, a numbersimilar to that earnedby gang leadersin ourdata. Totheextent that employeesof franchises appear tobe paid morethan thefoot soldiers, the distribution of wagesis moreskewed in thegang than in thetypical franchise. Relativeto existing estimates of the returns to drug selling based onself-reporteddata, ournumbers appear low.Thereare a numberof possibleexplanations forthis discrepancy.First,there maybe systematic misrepresentations in eitherour accounting data orin theself-reports of drug sellers.Although we do nothave self-reporteddata forthis particular gang,when we have asked footsoldiers in othergangs howmuch they earn, we often obtain highly inated valuesrelative to what thegang leadersreport foot soldiersin thegang making.Second, our sample of drug sellersis verydifferent fromthat ofReuter,MacCoun,and Murphy {1990} in Washington,DC, orFagan {1992} in NewY ork.Both of those studies focusedon independentdealers who are not wage earners, but ratherentrepreneurial capitalists. Thesellers in thosestudies aremore similar to officers or localleaders than footsoldiers and earnincomes that areconsistent with thehigher-level members of this gang.

IV. CAUSES AND CONSEQUENCESOF GANG WARS Dueto the illicit natureof thedrug trade,gangs donot have accessto legally enforceable contracts or property rights. The illegality ofdrug sellingalso makes advertising difficult. As a consequence,violence emerges both as aprimarytool with which disputes areresolved (both within thegang and acrossgangs) and is usedstrategically as aformof nonprice competition. In this sectionwe investigate gang wars. In this paper agang war is deŽned as aprolongedperiod of violenceinvolving repeated exchanges of weapons Ž rebetween rival gangs.During gang wars,there is an easilydiscernible reductionin streetactivity and public loitering,and typically a heightenedpolice presence. Information on theexistence of agang 776 QUARTERLY JOURNALOF ECONOMICS

TABLE IV THE IMPACT OF GANG WARS ON GANG FINANCES MonthlyAverages in 1995 Dollars

Preexpansion Postexpansion

Gang No gang Gang No gang Category war war war war

Totalrevenues 17,10025,600 54,500 76,900 Drug sales 10,90019,000 44,500 58,900 Dues 5,3005,300 10,000 10,000 Extortionarytaxes 900 1,300 0 8,000 Totalnonwage costs 10,20010,600 30,400 24,500 Costof drugs sold 2,8003,900 11,300 12,800 Tributeto gang hierarchy 1,4005,000 5,800 5,900 MercenaryŽ ghters 3,600 0 5,000 0 Funerals/paymentsto families of the deceased 1,000300 2,300 800 Weapons 600300 3,000 1,600 Miscellaneousexpenses 8001,100 3,000 3,400 Totalgang wages 7,9006,600 25,600 37,600 Officers 1,5002,900 2,300 3,800 Footsoldiers 6,4003,700 23,300 33,800 NetproŽ t accruing toleader 2 1,000 8,400 2 1,50014,800 Monthlywage per foot soldier 220 130 370 540 Priceand quantity of drugs sold: Quantity(‘ ‘bags’’) 1,4422,019 7,556 8,563 Price(per bag in 1995 dollars) 7.129.54 5.90 6.86

Datain the tablere ect monthly averagesfor the timeperiods in which agang war is or is not ongoing, bothbefore and afterthe expansion in territory. The Žve monthscorresponding tothe transition period associatedwith the growth in territory are excluded from the tabledue toambiguity aboutthe presence or absenceof agang war. Values are basedon monthly datafor the four-year period. Dataare unavailable for 6of the 48months in the sample. All dollar values have been converted into 1995dollars using the GDPdeator. All values are rounded tothe nearesthundred dollars. Estimatesinclude only revenue sources included in official gang records.

war during aparticular monthwas collectedby Venkateshin the contextof apast ethnographicanalysis. Overthe period we study , thereare seven episodic gang wars lasting fora totalof twelve months,or roughly one-quarter of our sample. There are gang wars in eachof thefour years of oursample.In addition, thereis a Žve-monthperiod of transitionin thethird yearof ourdata during whichthe gang incrementallyseizes control of the territory to the north.This transition period was characterizedby aprotracted, low-levelincidence of violence, unlike the acute outbursts of violencein theother gang wars. TableIV separatesthe data onrevenues and costsinto pre- ADRUG-SELLING GANG’S FINANCES 777 and postexpansiontime periods both with and withoutgang wars. TheŽ ve-monthtransition period is excludedfrom this table. Comparingcolumns 1 and 2(gang wars versusno gang war prior toexpansion), drug revenuesfall almostin half in war months. Thequantity ofdrugs sold falls 29 percent,and pricefalls 25 percent.Thus, gang wars differ fromepisodes where cooperation breaksdown amongcolluding suppliers {Porter1983; Ellison 1994}. In thosecases, price falls, and quantity rises.In contrast, gang wars inducelarge, adverse demand shocks.Customers are afraid tocome purchase drugs, as evidencedby thefollowing observationby agang officer:‘ ‘Ain’t noway nobodygonna come ‘roundhere looking for their rock {crack} iftheyknow they gonna getshot. People got too many options, man, they got too many n------that theycan buy theys--- from,so why cometo us if we can’t keeps--- safe for’ em?’’ Duringgang wars,net proŽ ts areactually slightly negative (2 $1000 permonth preexpansion; 2 $1500 permonth postexpan- sion).A monthof Ž ghting coststhe gang leaderover $10,000 on averagein short-runproŽ ts. Interestingly ,priorto the takeover thegang sellsdrugs at orbelowmarginal cost during gang wars. Drugsales bring in $10,900 permonth during gang wars. Foot-soldierwages, payments to mercenary Ž ghters,and costsof drugs sold areall marginalcosts. Expenditures onthose three categoriesadd up to$12,800 in gang wars,well above the revenuesgenerated. Thedecision to price below marginal cost suggests one of threepossibilities. First, the gang is simply mispricingtheir product.Second, the low price is astrategicresponse designed to punish therival gang forthe attack. Third, there may be costs for drug buyersassociated with switching suppliers. If that is the case,then pricing belowmarginal cost in theshort run to maintain marketshare may be rational{Klemperer 1995}. Discus- sionswith leaderssuggest that itisthelast oftheseexplanations that drivesthe decision to sell their product cheaply during gang wars.In thewords of oneleader,‘‘Warsis bad foreverybody ,soyou justgotta deal with it,take the loss. Cats, whenthey start using, theyneed their s--- {drugs}. Theycan go all overto get what they needif youain’ t selling.So you take care of them. Sometimes we justgive them something free so they come back when s--- quiets down.’’ AŽnal featureto note with respectto gang wars is thesteep increasein foot-soldierwages during wars in theearly part ofthe 778 QUARTERLY JOURNALOF ECONOMICS sample.Preexpansion, foot-soldier wages are almost 70 percent higherduring gang wars. 24 Theincrease in foot-soldierwages appears tobe a clearexample of compensating differentials. As onefoot soldier put it at thetime: ‘ ‘Wouldyou stand aroundhere whenall this s--- {shooting}is goingon? No, right? So if Igonnabe askedto put mylife ontheline, then front me thecash, man. Pay memore‘ causeit ain’t worthmy timeto be here when {the gangs are}warring.’ ’ Comparingcolumns 3 and 4ofTable IV ,thecompensating differential paid bythegang in war monthsdisappears. Whilethis is somewhatpuzzling, oneexplanation is that footsoldiers are beingpaid sucha highwage postexpansion. Thus, even though thewage falls somewhatduring wars,it is higherthan in preexpansionwar months.Given that thegang leaderabsorbs lossesin war periods,a cash-ow constraint on the part ofthe leaderwould providea simpleexplanation forwhy wagesdo not riseduring wars in thelatter half ofthe sample. According to anothergang leader,it is notactually cashconstraints that limit wagepayments, but ratherthe perceived importance of theleader makinga proŽt: ‘ ‘Yougotall thesen------belowyou who want your job,you dig. So,you know ,youtry to take care of them, but you know,youalso have to show them you the boss. Y oualways haveto getyours Ž rst,or else you really ain’ t noleader. {If} youstart taking losses,they see you {as} weakand s---.’’ TableV presentsregression analysis ofthe data in orderto controlfor multiple factors changing in thedata simultaneously. Trendsin thedrug trade,seasonal  uctuations,and theexpansion ofthe gang’ s turf makedirect interpretation of the summary statistics potentially misleading. Thebasic speciŽcation utilized is as follows:

(1) DEPVARt 5 a 1 b 1WAR 1 b 2TRANSITION

1 b 3POSTEXPANSION 1 SEASON INDICATORS

1 TIME TREND 1 e t, where t indexestime and DEPVAR is any oneof arangeof possible gang Žnancial measures:proŽ ts (as measuredby theresidual

24.This rise is almost certainly a lowerbound on theincrease in the hourly wagebecause the number of hours worked duringgang wars istypicallyless than thatin nongang war months. ADRUG-SELLING GANG’S FINANCES 779

TABLE V REGRESSION RESULTS

Foot Gang surplus Gang Revenues soldier (leaderproŽ t leader from drug hourly Variable plus wages) proŽt salesPrice Quantity wage

Gang war 2 13,407 2 11,030 2 10,982 2 1.90 2 879 1.30 (2,210)(1,307) (1,830) (.38) (147) (.45) Transitionperiod 1,352 2 998 690 2 1.49719 1.08 (3,496)(2,038) (3,248) (.84) (225) (.76) Postexpansion 23,735 2 444 24,340 2 2.094,818 4.07 (3411)(1,983) (3,246) (.89) (218) (.75) Summer 2 1,546 2 771 2 1,531 .06 2 144 2 .07 (2,393)(1,402) (2,125) (.50) (156) (.51) Fall 3,6854,456 3,048 .60 325 2 .13 (2,261)(1,319) (2,085) (.52) (145) (.49) Winter 2,0452,737 1,283 .55 2 83 2 .05 (2,681)(1,575) (2,336) (.53) (175) (.56) Monthlytrend 261 162 483 2 .006 57 .004 (106)(62) (101) (.028) (7) (.023) Intercept 12,1205,204 12,193 9.15 1,238 1.83 (2321)(1,352) (2,178) (.59) (149) (.51) r 2 .23 2 .26 2 .03 .23 2 .30 2 .10 Adjusted R2 .90 .80 .94 .50 .99 .74 Meanof dependent variable 22,2947,474 28,267 8.05 3,789 3.41

Dependent variable is listed atthe topof each column. The unit ofobservation is amonth. Datacover a four-year period, with six monthsmissing over the sample. All values are in dollars except for quantity, which roughly corresponds tonumber of bagssold. The Cochran-Orcutt estimationmethod is used toallow for Žrst-order serial correlation. r is the estimateddegree of serial correlation. All estimatesare basedon official gang records and have not been corrected for potential underreporting. Standard errors are in parentheses.

incomestream accruing to the local leader), price, quantity ,etc. WAR is an indicatorvariable equal toone if agang war occursin themonth in question,or zerootherwise. WAR is bestinterpreted as asummarystatistic forrisk. Given the limited sample, it is impossibleto disentangle the individual contributionsof the underlyingrisk factors (death, injury,and arrest),all ofwhichare positivelycorrelated. TRANSITION is anindicatorvariable equal toone in theŽ vemonths during whichthe gang’ s turf was expanding, and zerootherwise. POSTEXPANSION is an indica- torvariable equalto one after the expansion is complete,and zero otherwise.The omitted category is preexpansion.Three seasonal dummiesare included (spring is theomitted category), as is a lineartime trend. When included, a quadratic timetrend was 780 QUARTERLY JOURNALOF ECONOMICS neverstatistically signiŽcant and generallydid nothave a large effecton the key coefficients. Equation (i) is estimatedusing the Cochran-Orcuttprocedure allowing forŽ rst-orderserial correla- tionin theerror term. TableV presentsthe regression results. Each columncorre- sponds toa different dependentvariable. Somewhat surprisingly , theredoes not appear tobea strongseasonal component to any of thevariables. In general,fall appears tobe the best season for sellingdrugs, and summerthe worst. For most of the columns, however,onecannot reject the null hypothesisof no seasonal effects.Even after controlling for the turf expansion,there are strongpositive trends in gang surplus,proŽ t, drug revenues,and quantity sold.Drug revenues, for instance, increased almost $500 permonth over the sample, everything else held constant.This increaseis entirelyattributable toan increasein thequantity of drugs sold.Price exhibits a negative,but statistically insigniŽcant trend.The transition period is notvery different fromthe preex- pansion months:quantity risesand pricefalls, but revenues, proŽts, and totalsurplus arestatistically indistinguishable from theearlier period. The postexpansion months, on theother hand, representa radical break. Wars areassociated with dramatic declinesin price,quantity , proŽt, and drug revenue.The regression results support the compensatingdifferential story,with foot-soldierhourly wages about40 percenthigher during gang wars.All oftheseestimates areroughly consistent in magnitudewith theimpacts observedin thesummary statistics in earliertables. In all casesthe gang war variable is highly statistically signiŽcant. 25 Giventhe costs of gang wars,it is somewhatpuzzling that theyoccur so frequently in thedata. Economistsgenerally believe that twoparties should beable tobargain toan efficientoutcome, althoughthere are many examples to the contrary (e.g., labor strikes,the killing ofhostages,wars, etc.). The bargaining prob- lemfaced by thegangs is aparticularly difficult onedue to the absenceof property rights and legallybinding contracts.The

25.It is possible that gang wars haveboth contemporaneous and lagged effectson gang Žnances.T otestthat hypothesis, once-lagged values of WAR were addedto the speciŽ cations in TableV .Althoughnever statistically signiŽ cant, the laggedwar variablestake on the opposite sign of the contemporaneous war measurein almost every instance. For instance, drug revenuesare roughly $4000 higherthan otherwise would be expectedin the month after a gang war (standard error equalto 2500). This suggests that there is some intertemporal demand shiftingtaking place,with buyers delaying consumption until the gang war ends. ADRUG-SELLING GANG’S FINANCES 781 conditionsof the Coase Theorem, therefore, do not apply .Given liquidity constraintson the part ofthelocal leaders, problems of commitment,and an inability toprevent new entrants, it would bedifficult forone gang leaderto make a largecash transferto the otherin returnfor transferring control of turf.Furthermore, given therisk of violence,face-to-face bargaining is difficult becausethe opposing gang leadermay simply killyou. Thus, Ž ghting may havebeen the only feasible means of transferringcontrol. Whileit is notsurprising that acostlesstransfer of control couldnot be arranged, the inability ofthe two gangs tobetter maintain acollusiveequilibrium is somewhatof apuzzle. Thisis especiallytrue given that gang wars areso costly for both sides and that bothparticipants demonstratea willingnessto punish theother gang (e.g.,drive-by shootings)ex post.The explanation forthis appears tobe that thereare important agency problems within thegang that makesuch collusion unstable. Much ofthe violenceis notsanctionedby thegang, but ratherarises because a particular footsoldier interested in movingup thehierarchy may havea strongincentive to build areputationfor toughness and thus mayengage in violenceeven if suchactions run counter to thebest interests of the gang. Once such violence occurs, it is difficult forthe opposing gang notto retaliate. Reining in the violentpropensities of the foot soldiers appears tobe one of the mostimportant managerial tasks ofagang leader.As oneleader put it,‘ ‘Wetry to tell these shorties {foot soldiers} that theybelong toaseriousorganization. It ain’t all aboutkilling. They see these moviesand s---, theythink its all aboutrunning around tearing s--- up. But, its not.Y ougotta learn how to be part ofan organization,you can’ t beŽ ghting all thetime. Its bad for business.’’ Leadersadhere to these words when it comestime for promotion.Although willingness to engage in limitedviolence increasesthe likelihood of promotionto the rank of officer,those whoengage in wantonviolence do not advance {Venkateshand Levitt1999}. AlthoughŽ ghting mayhave been a highcost means to transfercontrol of theterritory north of thegang weobserve, it is clearthat thereare efficiency gains oncethe takeover is complete. Gang surplus and drug revenuesare over $23,000 amonthhigher afterthe expansion, or almost double the mean values for these variables observedover the sample. Based onadmittedly crude informationobtained fromthe rival gang tothe north, their drug revenuewas threetimes lower than thesubsequent earnings 782 QUARTERLY JOURNALOF ECONOMICS reapedafter the gang weobserve usurped control.The escalation inrevenueis primarily dueto the weak organizational structure oftherival gang,one ill-suited todrug selling.In therival gang, thelocal leader serves as awholesaledistributer fromwhom low-levelgang members(like our foot soldiers) purchase drugs, whichthey in turnsell on the street. Low-level sellers need to raisecapital topurchase the wholesale drugs. This turns out to be an importantconstraint. Consequently ,therival gang has a smallernumber of sellerson thestreet at any giventime. These different organizationalstructures are carried over from the 1960s, priorto crack. The rival gang was unableor unwilling to adopt amorecorporate form when crack arrived. 26 In addition, the increasedproŽ tability afterconsolidation is aby-product ofthe doubling ofterritory which increased the local market power of thegang. Many ofthe customers come on foot, so increasing a gang’s turf from12 squareblocks to 24 squareblocks may substantially reducecompetition. Consistent with thelocal mar- ketpower hypothesis is thefact that theprice of crackcharged by thegang doesnot fall as quicklyafter the takeover as doesthe citywide priceof crack(a 27 percentdecline between year 2 and year4 forthe gang relativeto a 40 percentcitywide pricefall {Abt 1997}).27 AŽnal point worthnoting on gang wars is that theirstrategic aspects arenot lost on the participants. Gangs useviolence on theircompetition’ s turf as an explicit strategyfor shifting demand totheirown territory .As oneformer member of therival gang put itduring agang war:

Seethe thing is they {the gang forwhich we have data} got all these placesto sell, they got the numbers {of sellers}, you know .It’s notlike we can reallydo what theydoing. So we gotta try getsome kinda advantage, a businessadvantage. If we start shootingaround there {the other gang’ s territory}, nobody,andI meanit youdig, nobody gonna step on theirturf. But wegotta be careful, ’ causethey can shoot around here too and then we all f------.But, it’s likewe ain’ t gota lottamoves we can make, so Iseeshooting in their’ hoodas one way tohelp us. In fact, in somecases, a gang engagesin drive-by shootingson a rival’s turf,Ž ringinto the air. The intention is notto hurtanyone,

26.Interestingly ,thissame scenario plays out in manyareas across the city . Theshare of turf inthe city representedby therival gang familydeclines sharply inthe Ž veyears after the arrival of crack, mostlikely as a resultof the ineffectivenessof this gang atmaximizingdrug revenues. 27.Noise in the price series is substantial,so this conjecture must be viewed ashighlyspeculative. ADRUG-SELLING GANG’S FINANCES 783

TABLE VI FREQUENCY OF ADVERSE EVENTS

Likelihoodof occurrenceper person month

Preexpansion Postexpansion Cumulative frequency Gang No gang Transition Gang No gang over four- Adverseevent war war period war war year period

Violentdeath .012 0.018.021 .002 .277 Nonfatalwound or injury .078.033 .100 .075 .051 2.40 Arrest .155.103 .214 .219 .133 5.94 Numberof months in sample 9 17 5 3 8 42

Dataare basedon interviews, research notesgathered over the course ofthe period, and gang records. Adverse events include only thoseaffecting core gang members(i.e., leader, other officers, footsoldiers). The Žrstfour columns capture monthly frequencies; the Žnal column is the cumulative frequency over the four years in our study,taking into account the fraction ofmonthsthat fall into each category in the sample. but ratherto scare potential buyers. It is interestingto note that thegang memberunderstands thegame-theoretic consequences ofsuchactions corresponding to retaliationby therival, in which caseboth parties areworse off than if noviolence had occurred.

V. THE DANGERS OF DRUG SELLING ANDTHE WILLINGNESS OF GANG MEMBERS TO ACCEPT RISK TableVI presentsinformation on the frequency of adverse eventsin oursample, expressed in termsof likelihood per gang memberper month. Results areseparately compiled for war and nonwarmonths before and afterthe takeover ,and forthe transi- tionperiod. These data arebased onŽeld notescompiled concur- rentwith theevents. The number of deaths is completeand accurate.The counts on injuries and arrestsrepresent lower bounds as someof thesemight have been left outoftheŽ eld notes. Unfortunately,wedo nothave good information on timeserved in jail orprison by thegang membersas aconsequenceof these arrests. TableVI highlights thetremendous risks associated with participation in thedrug trade,at leastin this particular gang during timesof Žghting.The per-person likelihood of death ranges from1 to2 percenta monthduring gang wars and thetransition period.Using the actual numberof monthsin thesample falling intoeach category (listed in thebottom row of the table), it is possibleto construct the cumulative frequency of adverse events 784 QUARTERLY JOURNALOF ECONOMICS pergang memberover the four-year period observed. That numberis displayed in thelast columnof TableVI. Gang members whowere active for the entire four-year period had roughlya one infourchance of dying. Furthermore,there was an averageof over twononfatal injuries(mostly gunshot, but somedue to knives or Žsts) permember ,and almostsix arrests. 28 Therisks associated with sellingdrugs in this sampleare astonishing. By comparison, homicidevictimization rates for black malesaged 14–17 in the UnitedStates areroughly 1 in 1000 peryear, about 1/ 80 therate weobservein this sample.Even among rank and Žleof this gang (thoseaffiliated with thegang, but notactively engaged in the drug trade), homiciderates are only about 1 in 200 annually in our sample. Usingthe frequency of adverse events, it is possibleto calculatea roughestimate of thewillingness of thefoot soldiers to acceptrisk of death,or extrapolating, the implicit valuation they place ontheirown lives in thecurrent context {Viscusi 1992}. In orderfor such calculations to be reasonable, the participants must berelativelywell-informed about the rewards and risks,and the expost outcomesmust be consistent with exanteprojections. We generateestimates using fourdifferent possiblecomparisons. In eachinstance, we focus only on the likelihood of death, ignoring differencesin thenumber of injuriesor arrests. For this reason, thevalues we obtain maybe systematically upward biased. In all cases,we use the estimated wage that includesnot only the officially recordedpayments but alsothe ‘ ‘off-the-books’’ income adjustment. TheŽ rstcomparison is betweenfoot-soldier wages in war and nonwarmonths in thepreexpansion portion of our sample. The averagemonthly wage in war and nonwarmonths is calculated to be$250 and $150, respectively,ora $100 differential. 29 Given an observeddifferential in thechance of violent death of.012 per monthfrom Table VI, theimplied valueof a life is alittleover $8000. Thisnumber may be unrealistically low because foot soldiersmay be compelled to sell drugs during war months

28.The injury numbersdo not include injuries sustained as the result of punishmentby the gang forrules violations. Note that these adverse event calculationsrefer only to core gang members(i.e., the leader, officers, and foot soldiers).For peripheral gang members(i.e., the rank andŽ le)who are not actively involvedin drug dealing,the risks are an order of magnitudelower .Onerank and Žlewas killed during our sample, and a handfulwere wounded. 29.These monthly wages are based on the values reported in Table IV ,but adjustedfor off-the-books income. ADRUG-SELLING GANG’S FINANCES 785 throughthreats of punishment— in somegangs compulsionmay bequite pronounced with highexit costs. Furthermore, to the extentthat heroicactions in wars arerewarded with promotions, this static analysis maynot adequately capturethe trade-offs involvedin war months.Certainly ,acts ofheroismby soldiersin wartimeperiods are not uncommon, further calling intoquestion therelevance of this particular calculationas ameasureof willingnessto accept risk. Asecondpossible approach relieson a comparisonof foot- soldierwages pre- and postexpansion.In contrastto the previous measure,this calculationmay systematically overstate the value ofa life sincethe overall proŽ tability ofthe drug operationis increasingover time. Thus, part ofthewage increase may not be dueto the increased risk in thelatter part ofthe sample, but to otherfactors. Taking a weightedaverage over all relevantmonths, averagefoot-soldier wages rise from $185 permonth before expansionto $570 afterexpansion. The weighted average chance ofdeath perperson per month rises from .00415 beforeexpansion to.00718 afterwards. Thisapproach yields an implicit valuation of$127,000 onafoot-soldierlife. TheŽ nal twocomparisons are between gang wagesand marketwages (both beforeand afterexpansion). We use an (after-tax) marketwage of $4.00 as thebaseline. 30 Wealso assume that thelikelihood of violentdeath is zerofor nongang members. 31 The average gang wagebefore expansion is $6.60. Assuming twentyhours of worka week,the gang premiumtranslates into an extra$220 permonth. Given a .00415 chanceof death per month,the implicit valuation onlife is $53,000. Asimilarcalcula- tionfor the postexpansion period yields avaluation of$90,000. Notethat theselast twocomparisons may overstate the willing- nessto accept risk if gang workis morepleasant than aformal- sectorjob orthereare nonpecuniary beneŽ ts associatedwith gang membership. 32 In all fourscenarios examined, foot soldiers demonstrate an apparent willingnessto accept risks of death in returnfor small

30.Because of low earnings, the tax rateon legitimate sector earnings is likelyto be low .However,if the individual lives in a householdreceiving AFDC and thisincome is reported, then the marginal tax ratemay in fact beclose to (or even greaterthan) one. 31.Using the death rate of rank andŽ lefrom this gang doesnot materially affectthe conclusions. 32.Although many of thenonpecuniary beneŽ ts of the gang areavailable to therank andŽ lewithout the high risk ofdeathfaced by foot soldiers. 786 QUARTERLY JOURNALOF ECONOMICS amountsof Ž nancial compensation.The values obtained in this paper arefar belowthose typically found in theliterature {Viscusi 1992}. Ourresults are consistent with thematter-of-fact manner in whichfoot soldiers speak about death. For instance, one nineteenyear-old foot soldier described his situationas follows, ‘‘It’s awar outhere, man. I meaneveryday people struggling to survive,so you know ,wejust do what wecan. We ain’ t gotno choice,and if that meansgetting killed, well s---, it’s what n------do aroundhere to feed their family .’’ An alternativeexplanation forthe low estimated value of life isthat theex post death ratesexceeded the ex ante predictions of theparticipants. Thedeath ratesin oursample are higher than havebeen found in past research.Kennedy ,Piehl,and Braga {1996}, forinstance, estimate annual death ratesof Bostongang membersto be between 1.5 and 2percent. 33 Usingthat death rate inplace ofthenumbers we obtain, the wage differentials weŽ nd yield estimatedvaluations oflife ofat most$500,000— still only one-tenththe typical estimatein this literature.

VI. CONCLUSION Thispaper providesthe Ž rstdetailed analysis oftheŽ nancial activitiesof an entrepreneurialstreet gang. The data imply that forthis gang drug dealing is notparticularly lucrative,yielding averagewages only slightly abovethose of the legitimate sector . Hourlywages for those on thelowest rung of the gang hierarchy areno betterthan theminimum wage. The wage structure within thegang is highly skewed,however, so that themore reasonable way tomeasure the economic rationale for gang participation is in thecontext of a tournament.Gang wars areextremely costly in termsof injuries, death, and proŽts. Nonetheless, Ž ghting takes place overroughly one-fourth of the sample. The willingness to accepta riskof death amonggang membersappears tobe extremelyhigh. Takenas awhole,our results suggest that evenin this Žnancially sophisticated ‘‘corporate’’ gang,it is difficult (but not impossible)to reconcile the behavior of the gang memberswith an optimizing economicmodel without assuming nonstandard prefer-

33.Rosenfeld and Decker {1996}report that annual violent death rates among all African-Americanmales between the ages of 15and24 inSt. Louiswere 0.5percent in theearly 1990s. For gang membersthis number was undoubtedly muchhigher . ADRUG-SELLING GANG’S FINANCES 787 encesor bringing insocial/nonpecuniarybeneŽ ts ofgang partici- pation.Similarly ,whilecertain business practices such as fre- quentgang wars and pricing belowmarginal cost can be Ž tintoa frameworkof economic maximization, the possibility ofsubopti- maldecision making cannot be eliminated from consideration. Ourresults provide general guidance as topossible public policyinterventions that mightbe useful for combating gang violence.The fact that mostfoot soldiers are simultaneously employedby thegang and in thelegitimate sector suggests that gang participation maybe sensitive to improvements in outside opportunities.That suggests a possiblerole for job-market inter- ventionsaimed at high-riskyouths (see also Grogger {1991}). 34 However,giventhe tournament structure of the gang and the symbolicvalue attached tothe upward mobility,minorchanges in theimmediate economic returns to foot soldiers do not appear paramountin determininggang involvement.Thus, it seems unlikelythat sucha policyby itself couldbe successful. An alternativeapproach toreducing the attractiveness of gang involvementis tolower the proŽ tability oftheorganization. Oneway todo this would beto substantially increasepunish- mentsand enforcementagainst drug purchasers. Thiswould put downward pressureon boththe price and quantity ofdrugs sold.A verydifferent strategyis drug legalization.Faced with competi- tionfrom legal sources of drugs,the gang’ s marketwould evapo- rate.Without proŽ tto Ž ght over,gang violencewould likelyreturn toprecrack levels. Of course,the adverse consequences of either draconian punishmentof drug usersor legalization mightbe severeand needto be weighed against any beneŽts associated with reducedgang violence. It is impossibleto know how representative the particular gang westudy is.T otheextent that thegang keptdetailed Žnancial recordsand was expanding priorto the police crackdown that led totheir demise, one might suspect that this groupwas moreeconomically sophisticated than thetypical streetgang. Obtaining parallel data forother gangs remainsan important challenge.

UNIVERSITYOF CHICAGO AND AMERICAN BAR FOUNDATION COLUMBIA UNIVERSITY

34.A higherminimum wage might be counterproductive,however, if it leads toan increased income in the neighborhood and thus an increased demand for crack. Fora moregeneral discussion of organizedcrime in a generalequilibrium context,see Zakharova {1998}. 788 QUARTERLY JOURNALOF ECONOMICS

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