“Shocks to Production Risk and Supply Responses: Evidence from Darknet Data”, 2021-04-05 (; similar):
Darknet markets for illicit goods face law enforcement and public health researchers with new challenges and give economists an unique opportunity to study production under uncertainty. While current cryptomarket research focuses on the effects of police intervention on market participants, this thesis extends the literature by exploring the effects of Bitcoin price volatility, which is the main currency used on cryptomarkets.
Using scraped data from the largest cryptomarkets 2014–2015, I exploit an event study design to causally estimate dynamic paths of shocks to these 2 types of production risk. Within a month, high levels of police intervention and Bitcoin volatility s statistically-significant decrease the expected probability of market entry by 4.3% and 6.4%. While established vendors only show weak reactions to impulses in terms of drug supply, they pass on the added risk to buyers in the form of a short-term risk premium of around 4.8% (8.7%) in the case of an arrest (volatility) shock.
To my knowledge, this is the first study to establish a causal link between Bitcoin volatility and market outcomes on cryptomarkets, showing that criminals see police intervention as one of several production risks that vendors respond to with higher prices rather than lower supply.