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Traders, cops and robbers

By James E. Anderson and Oriana Bandiera

Abstract

Why does illegal trade often flourish without formal enforcement, but sometimes fail? Why do illegal tradereducing policies often fail? Why do States often appear to tolerate illegal trade? A model of trade with cops and robbers provides answers. `Safety in numbers' is a key element: the equilibrium probability of successful shipments is increasing in trade volume. Even without conventional fixed costs, safety in numbers implies scale economies which can explain the absence or robustness of trade subject to predation. Spilling over between markets, safety in numbers implies that illegal trade can foster legal trade and State revenue

Topics: HB Economic Theory
Publisher: National Bureau of Economic Research
Year: 2003
OAI identifier: oai:eprints.lse.ac.uk:4720
Provided by: LSE Research Online
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