Should drug policy be aimed against cartel leaders? Breaking down a peaceful equilibrium

Available from: 
October 2013
Paper author(s): 
Juan Camilo Castillo (Universidad de los Andes)
Topic: 
Conflict, Crime and Violence
Year: 
2013

LACEA2013
Anecdotal evidence suggests that violence increases when governments achieve their objective of beheading and fragmenting drug trafficking organizations (DTOs). This unintended consequence of successful policy has been observed during the last decade in Colombia and Mexico, to name two recent examples. In this paper I provide a theoretical framework to understand this behavior. Drawing elements from industrial organization and game theory, I model DTOs as firms that collude by not attacking each other in order to obtain larger profits from the drug trade. Profit-maximizing DTOs always collude when they interact repeatedly, which means that previous analyses focusing on a static Nash equilibrium miss an important part of DTOs' behavior. I show that a peaceful equilibrium arises if there are only a few DTOs that care enough about the future. Policies resulting either in a larger number of DTOs or in more impatient leaders increase war between DTOs without any supply reduction. On the other hand, policies that focus on reducing the productivity of DTOs, without directly attacking cartel leaders and fragmenting DTOs, are more desirable since they can reduce supply, but this may come at the cost of increased violence if demand is sufficiently inelastic.

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Research section: 
Lacea 2013 annual meeting
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