“The Limits of Reputation Signaling in Adversely Selected Markets: Applications to Dark Net Cocaine Markets”, 2019-06-01 (; backlinks; similar):
Dark net markets present a rare opportunity to examine markets with little contract enforcement and strong asymmetric information. The review systems on these sites prevent market collapse by allowing good vendors to accrue reputation, signaling high quality products. This paper examines cocaine listings on the Dream Market dark net site. Despite uniformly high ratings across all vendors, I find a price differential between escrow transactions—which function as strong contracts—and non-escrow transactions.
This supports existing models of markets with reputation signaling that become heavily saturated with highly reputable vendors, yet these vendors still have a nonzero chance of scamming their customers in an exit-scheme. I argue that the price differential represents the discount high-reputation vendors must offer consumers to offset the inherent risk the transaction is a scam.
[Keywords: Adverse Selection, Dark Net Markets, Moral Hazard, Online, Drugs.]