Property rights’ emergence in illicit drug markets

Governance rules are efficient mechanisms in the sense that they increase people’s welfare. They emerge even when the state is unable or refuses to create and enforce them. We study a situation in which this demand for governance manifests itself through the emergence of property rights in illicit drug markets: a privately-provided governance. Specifically, we propose a model for property rights emergence in illicit drug markets as predicted by the theory on governance provided by prison gangs. It is studied a situation in which an agreement among criminals, resembling property rights enforceability on its allocative effect, can emerge in illicit drug markets. Our Mechanism Design approach shows that a change inside the prison system, from a competitive environment to the hegemony of a group of criminals, implies the equilibrium in illicit markets to shift from warfare to peace: the hegemonic group is shown to desire to promote the collusive agreement when it is able to do so. This contrasts with the equilibrium under no hegemony, in which the possibility to conquer consumers/territories drives violence up to a positive level. The novel empirical perspective implied by the model is explored using data from Brazil, a context for which the theory of governance provided by prison gangs has been pointed as a key explanation.