This proposal outlines a research agenda for analyzing the economics of gangs and illegal drug selling. The subject of gangs is one that has historically been studied by sociologists and ethnographers, but has received little attention from economists. This research is likely to have important public policy implications as well as being a useful teaching tool. Studying economic issues in non-standard applications such as drug selling is a convenient means of introducing noneconomists to basic economic principles. In conjunction with this research, a graduate law and economics course is developed that stresses the empirical contributions of law and economics. This new course will be quite different from the standard law and economics offering which heavily emphasizes theory. The project described has three primary components. The first is an economic analysis of a drugselling gang's finances. A gang has provided four years of detailed financial data to myself and co-author Sudhir Venkatesh. This data records the price and quantity of drugs sold, a wide range of expenses, and wage information on a monthly basis. This financial data is supplemented with information on the number of deaths and arrests of gang members, as well as information on the timing of gang wars. These data allow a test of a number of economic theories and the determination of the economic returns to drug distribution. During the time period examined, the gang succeeds in expanding its territory, allowing for an analysis of a number of industrial organization hypotheses. The second component of the project is an analysis of the link between opportunities for illegal drug distribution and the academic performance and attainment of African American males. Drug selling both provides an opportunity for immediate earnings by teenagers, and is less likely to reward the skills/signal value of formal education. Both of these factors will tend to reduce investment in educational human capital by African American males. Using a unique data set made available by the Chicago Public Schools and linking this data to a number of measures of gang activity, it will be possible to address these issues. Preliminary analysis demonstrates a large gender gap in educational attainment for African American males, and suggests that this gender gap is greatest in those schools with the highest degree of gang activity. The final component of the project is an analysis of the organizational structure of gangs. Because gangs operate outside the sphere of civil law, both property rights and contracts must be enforced through means other than formal contracts. By analyzing the organizational forms adopted by gangs, insights will be gained into a range of issues related to the internal workings of firms, both illegal and legal. Exploratory research reveals that some gangs have adopted organizational forms mirroring that of a franchised corporation, whereas other gangs have decidedly non-corporate structures. The reasons for these differences, the advantages and disadvantages of the various organizational structures (e.g. with respect to incentives, raising capital, information flow, etc.), and the degree to which gangs with more efficient organizational structures tend to expand at the expense of less efficient organizations are explored.
The second component of the project is an analysis of the link between opportunities for illegal drug distribution and the academic performance and attainment of African American males. Drug selling both provides an opportunity for immediate earnings by teenagers, and is less likely to reward the skills/signal value of formal education. Both of these factors will tend to reduce investment in educational human capital by African American males. Using a unique data set made available by the Chicago Public Schools and linking this data to a number of measures of gang activity, it will be possible to address these issues. Preliminary analysis demonstrates a large gender gap in educational attainment for African American males, and suggests that this gender gap is greatest in those schools with the highest degree of gang activity. The final component of the project is an analysis of the organizational structure of gangs. Because gangs operate outside the sphere of civil law, both property rights and contracts must be enforced through means other than formal contracts. By analyzing the organizational forms adopted by gangs, we hope to gain insight into a range of issues related to the internal workings of firms, both illegal and legal. Exploratory research reveals that some gangs have adopted organizational forms mirroring that of a franchised corporation, whereas other gangs have decidedly non-corporate structures. We hope to explore the reasons for these differences, the advantages and disadvantages of the various organizational structures (e.g. with respect to incentives, raising capital, information flow, etc.), and the degree to which gangs with more efficient organizational structures tend to expand at the expense of less efficient organizations.
