ECONOMICS OF ILLICIT BEHAVIORS: EXCHANGE IN THE INTERNET WILD WEST by Julia R. Norgaard A Dissertation Submitted to the Graduate Faculty of George Mason University in Partial Fulfillment of The Requirements for the Degree of Doctor of Philosophy Economics Committee: ___________________________________________ Director ___________________________________________ ___________________________________________ ___________________________________________ Department Chairperson ___________________________________________ Program Director ___________________________________________ Dean, College of Humanities and Social Sciences Date: _____________________________________ Spring Semester 2017 George Mason University Fairfax, VA Economics of Illicit Behaviors: Exchange in the Internet Wild West A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy at George Mason University By Julia R. Norgaard Master of Arts George Mason University, 2015 Bachelor of Arts University of San Diego, 2012 Director: Dr. Thomas Stratmann, Professor and Dissertation Chair Department of Economics Spring Semester 2017 George Mason University Fairfax, VA Copyright 2017 Julia R. Norgaard All Rights Reserved ii Dedication This is dedicated to my wonderful parents Clark and Jill, who introduced me to economics and taught me how to be a dedicated scholar and a good and faithful person. iii Acknowledgements Thank you to my family and friends who have supported me throughout my graduate journey. My boyfriend, Ennio, who gave me feedback on my research and provided helpful comments and encouragement. My colleagues who have provided me with fruitful discussion, endless support, and wonderful friendship. My committee who has provided me with invaluable help and guidance. iv Table of Contents Page List of Tables…………………………………………………………………..……..xi List of Figures …………………………………………………………………..….. xii Abstract ………………………………………………………………………..……..ix Chapter 1 …………………………………………………………….………………..1 1. Introduction……………………………………………………….………………..1 2. An Overview of the Deep Web………………….…………………………………4 3. Reputation as a Mechanism for Market Accountability………………………..….8 4. Theoretical and Empirical Model……………………………………….………..12 5. Empirical Model …………………………………………………………………20 6. Data from the Silk Road………………………………………………………….21 Data Collection Procedure……………………………………………………….…..22 Variables Used in Empirical Analysis……………………………………………….24 7. Results……………………………………………………………………...……..26 Estimating Beta………………………………………………………………………29 8. Conclusion…………………………………………………………………..……31 Chapter 2 ………………………………………………………………………….…34 1. Introduction………………………………………………………………….……34 2. The Dark Net……………………………………………………………………...37 3. The Economics of Anonymity, Private Governance, and Club Goods…………..40 Anonymity………………………………………………………………………...…40 Private Governance and Club Goods……………………………..……...…………..44 4. A Model of the Internet Black Market………………………………………...….46 The Anonymity Problem………………………………………………...………...…46 5. Evidence…………………………………………………………………………..50 Private Governance in The Dark Net……………………………………...………....50 Residual Claimancy……………………………………………………………...…..52 Exclusion……………………………………………………………………….….…54 Advertising…………………………………………………………………….……..55 Branding…………………………………………………………………………...…57 Contract Enforcement……………………………………………………………..…59 Fraud Prevention……………………………………………………………………..60 Provision of Club Goods in the Dark Net…………………………………..………..62 Personal Security Services…………………………………………………..……….62 Conflict Resolution Services……………………………………………...………….65 6. Conclusion...………………………………………………………………………67 Chapter 3……………………………………………………………………….…….69 v 1. Introduction……………………………………………………………...………..69 2. The Digital Marketplace for Illicit Goods……………………………….…….….71 The Dark Net………………………………………………………………….……...71 Tor: The Onion Router………………………………………………………....……72 Cryptomarkets……………………………………………………………….……….73 3. Markets and Hierarchies……………………………………….…………………76 Organized Crime………………………………………………………….………….76 Networks and Hierarchy……………………………………………………………..80 Hypothesis……………………………………………………………………..……..82 Preliminary Evidence……………………………………………….………………..82 4. Testing our Hypothesis Using Agent Based Modeling……………...……………83 Purpose……………………………………………………………………………….83 The Mechanics of Agent Based Modeling……………………….…………………..85 Our Model………………………………………………………...………………….88 Model Visuals……………………………………………..…………………..……..91 Entities, State Variables, and Scales………………………………………..………..96 Process Overview and Scheduling………………………………….………………..99 Process Overview of Ground Model……………………………………..…………100 Process Overview of Virtual Model….……………………………………….…….101 Design Concepts…………………………………………………………….…..…..102 Results……………………………………………………………………….…..…..105 5. Conclusion…………………………………………………...…………….…….116 Appendix……………………………………………………………………….……118 List of References……………………………………………………………….…..136 Biography……………………………………………………..………………….….148 vi List of Tables Table Page 1. Summary Stats …………………………………………………………………...26 2. GLS Regressions of Effect of Reputation on Log Price per Gram……………….28 3. ß…………………………………………………………………………….……..30 4. Unedited List of Drug Types Parsed from Dark Web Data…………...….Appendix vii List of Figures Figure Page 1. Darknet Markets 1 …………………………………………………….….Appendix 2. Darknet Markets 2……………………………………………..………….Appendix 3. Silk Road 1………………………………………………………………. Appendix 4. Silk Road 2………………………………………………………………. Appendix 5. Feedback………………………………………………………………….Appendix 6. Item View……………………………………..………..………………….Appendix 7. Initial Scenario …………………………..………………………………….……47 8. Provision of Private Governance and Club Goods…………………………….…49 9. Darknet Market Lifespan ……………………………………………...…Appendix 10. Support………………………………………………….……………….Appendix 11. Product on Dream Market………...……………………………………. Appendix 12. Product on AlphaBay…………………………………..………………. Appendix 13. Listing Feedback on AlphaBay……………...…………………………. Appendix 14. Listing Feedback on Wall St. Market…………………….……………. Appendix 15. Forums Hansa 1……………………………………………………..…. Appendix 16. Forums Hansa 2……………………………………………..…………. Appendix 17. Hansa Top Vendors………………………………….…………………. Appendix 18. Wall St. Market Featured Listings………………..……………………. Appendix 19. Hansa Drugs……………………………………………………………. Appendix 20. All Products on Valhalla…………………….…………………………. Appendix 21. Free Sample Hansa…………………………………..…………………. Appendix 22. Dream Market Forums 1…………………….…………………………. Appendix 23. Dream Market Forums 2…………………….…………………………. Appendix 24. Shop Dream Market……………………………………………………. Appendix 25. Remove Feedback………………………………………...……………. Appendix 26. PGP 1……………………………………………………..……………. Appendix 27. PGP 2………………………………………………..…………………. Appendix 28. Forbidden Goods on Hansa……………………………………………. Appendix 29. Hansa Knowledge Base and Support……….…………………………. Appendix 30. Vendors…………………………………………………………...……. Appendix 31. To Setup…………………………………………………………..……. Appendix 32. Decide to Buy More Drugs Virtual 1……..……………………………. Appendix 33. Decide to Buy More Drugs Ground 1……………….…………………. Appendix 34. Turtles……………………………………………………………….…. Appendix 35. To Setup 2………………………………………………………...……. Appendix viii 36. Set up Agents………………………………………………..…………. Appendix 37. Decide to Buy More Drugs Virtual 2…..………………………………. Appendix 38. Decide to Buy More Drugs Ground 2…………….……………………. Appendix 39. Controller Setup for Virtual Network……………………………………..…….91 40. Model Outcomes………………………………………………………..……….92 41. Output and Layout………………………………………………………...…….93 42. Output Ground Network…………………………………………………..…….94 43. Network Connections Ground Network………………………………..……….95 44. Network Connections Ground Network Layout…………………………..…….95 45. Network structure of Virtual network (Average Degree: 2.03, Density: 0.014)……………………………………………………………………………….106 46. Network structure of Ground network (Average Degree: 1.17, Density: 0.008) ………………………………………………………………………………………106 47. Average Path Length in Virtual and Ground Networks after 100 runs…….….108 48. Average Degree in Virtual and Ground Networks after 100 runs……….….….111 49. Average Betweenness in Virtual and Ground Networks after 100 runs….…….112 50. Average Network Density in Virtual and Ground Networks after 100 runs…....112 51. Average number of “strong” clusters in Virtual and Ground Networks….…….114 52. Average number of “weak” clusters in Virtual and Ground Networks…………114 53. Average Percent of Possible Transactions in Virtual and Ground Models…......115 ix Abstract ECONOMICS OF ILLICIT BEHAVIORS: EXCHANGE IN THE INTERNET WILD WEST Julia R. Norgaard, Ph.D. George Mason University, 2017 Dissertation Director: Dr. Thomas Stratmann The first paper is an analysis of the role reputation plays in the Deep Web using data from the Internet black market site, The Silk Road. This encrypted online marketplace employed crypto currency and functioned over the Tor network. Utilizing a modeling technique, informed by trade auction theory, we investigate the effect of seller reputation. Analysis of the seller’s reputation gives us insights into the factors that determine the prices of goods and services in this black marketplace. Data on cannabis listings is parsed from the Silk Road website and covers an 11-month time period, from November 2013 to October 2014. This data demonstrates that reputation acts as a sufficient self- enforcement mechanism to allow transactions. These findings exemplify the robustness of spontaneous order with respect to the Deep Web as an emergent marketplace. The second paper examines how the platform providers in the Internet Black Market, one of the world’s largest international markets for illicit