San Francisco State University Illegal Economics Drugs and Gangs Discussion Questions


Need to be answered, I will provide two articles attached that can help1) Levitt and Venkatesh identify a sharp increase in the wages of foot soldiers in the later part of their sample. Explain, using economic concepts and terms we have discussed in class, the possible explanations for this.2) One of the major limits on the size of a drug selling organization is the risk posed by employees. What are some examples of drug selling gangs dealing with this risk? 3) Based on Levitt and Venkatesh, and the video lectures, what options did the Central Leadership have besides dividing up neighborhoods by franchising? Name some of the possible benefits of franchise-type corporation in the illegal sector. How did Central Leadership motivate the franchise leaders?4) How does gang membership facilitate the distribution of drugs? What are some of the differences between street gangs and drug dealing enterprises? Based on class lecture, what sort of variation in the quality of street drugs would we expect to see for drugs sold by gang members and non-gang members?5) Briefly characterize Homeboys, Hustlers, Slangers, and Ballers. Do any of these character types overlap with agent identities in other works we have read?

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Street gangs have a long history in American cities [Thrasher
1927]. Until recently, gangs were organized primarily as social
peer groups. Any economic activities were of secondary importance [Suttles 1968; Klein 1995]. The last two decades, however,
have given rise to a dramatic transformation in street gangs, or
what Taylor [1990] terms their ‘‘corporatization.’’ When crack
became widely available in the mid-1980s, sold in small quantities
in fragmented street-corner markets, street gangs became the
logical distributors. The potential profit in drug dealing dwarfed
that previously available to gangs through other criminal channels. As a consequence, gangs became systematically involved in
the distribution of various narcotic substances including heroin
and crack-cocaine [Block and Block 1993].
Recent academic literature on gangs has examined some
aspects of their financial activities. Hagedorn [1988] and Padilla
[1992] suggest that gang members pursue financial activities in
response to alienation from legitimate labor markets. Jankowski’s
[1991] study of 37 gangs found that nearly all of them had an
expressed commitment to illicit revenue generation, but that
* We would like to thank Autry Harrison for his assistance on the project,
Jonathan Caulkins, Philip Cook, Jeffrey Fagan, Richard Freeman, Herbert Gans,
Alejandro Gaviria, Edward Glaeser, Timothy Groseclose, Nicholas Harney, Lewis
Kornhauser, Lance Lochner, Anne Piehl, Ron Nobles, David Rothman, Catherine
Wolfram, anonymous referees, and Lawrence Katz, as well as numerous seminar
participants and anonymous informants for providing access to some of the data.
The National Science Foundation and the National Consortium for Violence
Research provided financial support. Correspondence should be addressed to
Steven Levitt, Department of Economics, University of Chicago, 1126 East 59th
Street, Chicago, IL 60637. E-mail addresses:;
r 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of
The Quarterly Journal of Economics, August 2000
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We use a unique data set detailing the financial activities of a drug-selling
street gang to analyze gang economics. On average, earnings in the gang are
somewhat above the legitimate labor market alternative. The enormous risks of
drug selling, however, more than offset this small wage premium. Compensation
within the gang is highly skewed, and the prospect of future riches, not current
wages, is the primary economic motivation. The gang engages in repeated gang
wars and sometimes prices below marginal cost. Our results suggest that economic
factors alone are unlikely to adequately explain individual participation in the
gang or gang behavior.
1. There is also a related literature on organized crime (see, for instance,
Reuter [1983] and Schelling [1984]).
2. See Fagan and Freeman [1999] for a survey of this literature.
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performance differed according to various factors including organizational structure and community relations. Spergel [1995] has
shown significant racial and ethnic differences in illegal entrepreneurism. Akerlof and Yellen [1994] present a model analyzing the
relationship between police enforcement against gangs and community cooperation.1 In spite of this pioneering work, however,
many gaps in the literature remain. Although quantitative data
are sometimes used anecdotally, there is little in the way of
systematic data collection. Virtually all of the existing scholarship
is based on verbal reports by gang members, or in exceptional
cases, direct observation of trafficking [Bourgois 1989; Williams
1989]. The illicit nature of gang activities and the lack of formal
accounting procedures have precluded more systematic quantitative analysis prior to this study. Finally, many of the studies
report that gangs are embedded in citywide hierarchies, but they
do not examine the impact of this organizational structure on a
gang’s financial dealings.
A number of researchers have estimated the returns to crime
[Freeman 1992; Grogger 1995; Viscusi 1996; Wilson and Abrahamse 1992] and drug selling [Reuter, MacCoun, and Murphy
1990; Fagan 1992; Hagedorn 1994] through the use of selfreports.2 The returns to drug selling tend to be much greater than
that of other criminal activities, with frequent drug sellers
reporting mean annual incomes in the range of $20,000–$30,000.
Studies relying on ethnographic observation, however, find much
lower values for drug-related earnings, e.g., Bourgois [1995] and
Padilla [1992]. One explanation for this discrepancy is that the
self-report and ethnographic studies have focused on very different populations. The self-report studies have tended to survey
independent drug dealers, i.e., those with no gang affiliation,
whereas ethnographic research has focused on low-level members
of a hierarchy. Independents are likely to have greater ability,
experience, and access to capital than ‘‘foot soldiers’’ who sit at the
low end of the street gang’s organizational hierarchy. Our data,
which span the levels of a gang hierarchy, from rank-and-file
members to imprisoned leaders, offer a partial solution to this
problem. Higher-level gang members may tend to have similar
characteristics to independents.
In contrast to the returns to crime, there has been little
3. Southerland and Potter [1993] is an exception on this last point.
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attention paid to the ‘‘career path’’ of gang members, market
structure, organizational forms, competitive strategies, and how
economic activity is structured in the absence of legally enforceable contracts.3 In this paper we are able to directly analyze for
the first time a wide range of economic issues related to gangs and
drug distribution. We do so through the use of a unique data set
containing detailed financial information over a recent four-year
period for a now-defunct gang. These data were maintained by the
leader of the group as a management tool for tracking the gang’s
financial activities and for monitoring the behavior of gang
members. Updated monthly, the data include breakdowns of costs
and revenues into major components, as well as information on
the distribution of profits as wages to gang members at different
levels of the hierarchy. Information on both price and quantity is
included. These financial data are supplemented with information on the numbers of violent deaths, injuries, and arrests of gang
members over this period, as well as interviews and observational
analysis of the gang. While the data suffer from important
limitations and a number of potential biases (which appear
below), they nonetheless represent a substantial improvement on
previously available information.
Using these data, we analyze the extent to which the individual and collective actions of gang participants can reasonably
be characterized as emanating out of economic maximization. We
address three different issues in this regard. First, we examine
the economic returns to drug dealing relative to legitimate labor
market activities. The higher the returns to drug selling, the more
likely it is that the economic aspects of the gang are paramount.
We then consider the causes and consequences of gang wars.
Finally, we analyze the risk trade-offs made by gang members and
whether these can be reconciled with optimizing decision making.
A number of insights emerge from the paper. Street-level
sellers appear to earn roughly the minimum wage. Earnings
within the gang are enormously skewed, however, with high-level
gang members earning far more than their legitimate market
alternative. Thus, the primary economic motivation for low-level
gang members appears to be the possibility of rising up through
the hierarchy, as in the tournament model of Lazear and Rosen
[1981]. The average wage in the gang (taking into account all
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levels of the hierarchy) is perhaps somewhat above the available
legitimate market alternatives, but not appreciably higher.
Gang wars are costly, both in terms of lost lives and lost
profits. Almost all of the deaths of drug sellers are concentrated in
war periods. Moreover, the violence keeps customers away. This
negative shock to demand is associated with a fall of 20–30
percent in both the price and quantity of drugs sold during
fighting, and the drug operation becomes far less profitable. In
spite of this, the gang discussed in this paper fights with rivals
roughly one-fourth of the time. Gang wars are also an extremely
costly means of dispute resolution, but given the absence of legally
enforceable property rights and contracts, other means of resolving conflicts may be circumscribed. There is also evidence that
frequent gang wars are the result of an agency problem, namely
the desire of low-level gang members to build a reputation for
toughness may be in their personal interest, but will almost
assuredly be costly to the gang as a whole. We also document that
the gang prices below marginal cost during gang wars. Such
pricing can be reconciled with economic optimization if maintenance of market share is important and there are switching costs
among drug purchasers [Klemperer 1995], but may simply reflect
flawed decision making.
Finally, drug selling is an extremely dangerous activity.
Death rates in the sample are 7 percent annually. Given the
relatively low economic returns to drug selling noted above, the
implied willingness to accept risk on the part of the participants is
orders of magnitude higher than is typically observed in value of
life calculations. This suggests either that gang members have
very unusual preferences, that the ex post realization of death
rates was very different than the ex ante expectation, systematic
miscalculation of risk, or the presence of important noneconomic
Based on these findings, we conclude that even in this
gang—one of the most economically sophisticated and successful
gangs—the decision making of members is difficult (but not
impossible) to reconcile with that of optimizing economic agents.
Certainly, economic considerations play an important role in the
decisions of members and the activities of the gang. However, we
find that social/nonpecuniary factors are likely to play an important role as well. Of course, all of these conclusions are based on
the analysis of a single gang’s experience. The degree to which
these results are broadly generalizable remains an open question.
The gang4 for which we have data is located in an inner-city
neighborhood in a large, industrial American city.5 Table I provides social and economic data from the 1990 Census of Population and Housing for two census tracts representative of those in
which the gang operates, as well as nationwide averages for
purposes of comparison.6 Residents of the area are almost exclusively African-American (over 99 percent), as are all of the gang
members. The labor market experiences of the residents, particularly males, are far worse than those in the United States as a
whole. Unemployment rates for males in 1990 were over 35
percent—six times higher than the national average. In addition,
over 40 percent of males were not in the labor force. The female
unemployment rates are roughly half of the male unemployment
4. There is some imprecision in our use of the term ‘‘gang’’ here. Among gang
members themselves, the group we analyze is termed a ‘‘set.’’ A set is the small,
geographically concentrated unit around which local drug dealing is organized. A
particular set is likely to have affiliations with other sets in an overarching gang
structure (e.g., the Crips or the Bloods). In this paper we use the term gang rather
than set when referring to the small group we analyze in order to avoid confusion
of the mathematical and gang definitions of the word ‘‘set.’’ We will use the term
‘‘organization’’ to denote the overall cooperative that encompasses the many
geographically localized units.
5. Throughout the paper we withhold precise details of the gang’s location,
identity, and the exact time period examined in order to protect the anonymity of
those who have provided us with the data. The data were obtained in the course of
research for a multicity study of gang activities initiated by Venkatesh in the
6. The boundaries of the gang’s turf do not closely conform with a single
census tract. The part of the city in which the gang operates, however, is quite
homogeneous along socioeconomic lines. The census tracts we have chosen are
representative of the gang’s immediate neighborhood. The summary statistics
presented are population-weighted averages of the values for the two census
tracts, except for median family income, which is a simple average.
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The structure of the paper is as follows. Section I provides
background on the community in which the gang is situated, the
organizational structure of the gang, and the competitive environment within which it operates. Section II describes and summarizes the data set. Section III analyzes the economic returns to
drug selling in the gang. Section IV examines the causes and
consequences of gang wars. Section V documents the dangers of
drug selling and the willingness of gang members to accept risk.
Section VI offers a brief set of conclusions.
Percent Black
Male unemployment rate (percent)
Female unemployment rate (percent)
Percent of children in poverty
Percent of children in single-parent families
Percent of children in families receiving public assistance
Median family income
Educational attainment (age 25?)
Less than high school
High school
Some college
Bachelor’s degree or beyond
Percent owner-occupied housing
Percent of housing units that are boarded up
Place of residence five years earlier (in percent)
Same house
Different house, same country
Different county
U. S.
All data are from the 1990 Census of Population and Housing, located at the United States Census
web-site The values in the first column report population weighted averages for the two
census tracts in which the gang operates. For the variable median family income, a simple average of the two
medians is taken. Percent of children in single-parent families is calculated as the fraction of children not
living in a family with married parents.
Children in the neighborhood experience high probabilities of
adverse economic circumstances. Over half of the children were
below the poverty line at the time of the 1990 census. More than
three-quarters of all children live in single-parent families, and 60
percent are in families that receive public assistance.
Median family income is $15,077 annually, less than half of
the national average. A small fraction of the census tract is public
housing, although the immediate neighborhood in which the gang
operates does not include any large-scale public-housing complexes. Roughly half of adults in the community do not have a
high-school diploma. Only one in twenty residents has a degree
from a four-year college, compared with one in five Americans
A striking feature of the mobility patterns among neighborhood residents is the rarity with which outsiders move into the
neighborhood. Although there is movement within the county, less
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than 3 percent of the 1990 residents lived outside of the county in
1985. For the United States as a whole, residents were seven
times more likely to have moved to their current home from
outside of the county. The number of residents in the neighborhood in 1990 is less than half the number in 1950.
The organizational structure of the gang as a whole is shown
in Figure I. We use the titles used by the gang, except where those
titles would reveal the gang’s identity. The structure of the
organization is simple compared with most firms of comparable
size (see, for example, Baker, Gibbs, and Holmstrom [1994]). The
top-level of the organization is made up of what we broadly denote
the ‘‘central leadership.’’ This body is chaired by four to six
individuals with responsibility for devising the long-term strate-
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Organizational Structure
7. Within the organization, a clear distinction is made between those performing the two different functions of the central leadership. We ignore these
differences here because they are not material to the analysis we perform.
8. Rank and file who deal drugs would not do so on the gang’s own turf
(without risk of serious punishment), but rather might sell in other neighborhoods,
at their workplace in the legitimate sector, or at school.
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gies of the multistate organization, and maintaining relationships
with suppliers and affiliates in other regions of the country. The
central leadership also includes approximately twelve persons
who are responsible for collecting dues, overseeing recruitment of
new members, allocating punishments, and serving as liaisons to
the community.7 Roughly one-third of these leaders are imprisoned at any given time. The next tier in the organization is a group
of ‘‘local gang leaders’’ with specific territorial responsibility for
one or more localized gang. In the organization we study, there are
roughly 100 of such gang leaders. Reporting in to each gang leader
are three ‘‘officers.’’ The ‘‘enforcer’’ is responsible for ensuring the
safety of group members, the ‘‘treasurer’’ manages the liquid
assets of the group, and the ‘‘runner’’ performs the risky task of
transporting large quantities of drugs and money to and from the
supplier. Reporting to the enforcer are the ‘‘foot soldiers’’ who
serve as street-level drug sellers and from whose ranks future
officers and leaders arise. Foot soldiers are typically 16–22 years
of age, although potentially much older. At the periphery of the
gang is a ‘‘rank-and-file’’ member pool who span all ages (the age
range in the group we study is 14 to 40) and who have little formal
responsibility for drug selling. Rank and file, unlike foot soldiers
and higher gang members, pay dues to the gang, in return
receiving protection, status, and a reliable supply of drugs for
those who deal independently.8
The structure of the overall organization is similar to that of a
franchised company. Gang leaders pay a fee to the franchisers
(central leadership), but are the residual claimants on the profits
accruing to their franchise. In return for those tribute payments,
higher-ranking leaders ensure that a local gang has sufficient
protection (both on their turf and in prison), stable alliances with
other gang sets such that gang members can travel to other areas
of the city with relative safety, access to reliable sources of
wholesale drugs, and the possibility for members to rise up the
hierarchy into the upper echelon, where personal revenue and
power are considerably enhanced. The individual, local gang
units, like separate franchise owners, have relatively little interaction with one another.
The data that we have are for just one gang within the larger
organizational structure. That gang is overseen by a local gang
leader, and has one enforcer, one treasurer, and one runner at any
given point in time. The number of foot soldiers ranges between 25
and 75 over the period examined, and there are 60 to 200 rank and
file. At any given point in time, roughly one-fourth of the males
aged 16–22 in the neighborhood are foot soldiers.
The geographic and competitive landscape in which the gang
operates is detailed in Figure II. This gang’s turf for most of the
time period examined is a twelve-square block area bordered by
major thoroughfares on all sides. Most of the drug-dealing is
conducted along the edges of the territory on or near one of the
major streets. The gang sells perhaps 30 percent of the drugs to
those living within the twelve-block area—most of the remaining
purchasers come from a relatively limited geographic range. In
this particular area, few buyers come from the suburbs.
The areas to the immediate north and south of this gang’s turf
are controlled by separate, rival gangs. The time period for which
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The Geographic and Competitive Landscape of the Gang
The data set contains detailed financial information on the
activities of the gang described above on a monthly basis for a
recent four-year period. The data were originally maintained by
the leader in control of the gang, and they were updated each
month by the enforcer, who compiled the information by hand.
The data end abruptly with the arrest of the gang leader and other
officers. Shortly thereafter, the gang, weakened by these arrests
and beset by infighting, was overpowered by rivals, its turf
divided between enemy gangs. The gang we study is no longer in
operation. Most of the former gang members have since abandoned drug dealing. The person who supplied us the data is a
former gang member with ties to the gang that tracked the data
(although he was not necessarily directly affiliated with this
particular group). Our informant, after serving a prison sentence,
now holds a full-time job in the legitimate sector. For obvious
reasons, we have accommodated his request to remain anonymous.
Given the unusual nature of the data, it is important to
consider both its reliability and the degree to which it is representative of gangs more generally. On the most basic question of
authenticity, we have no reason to doubt that the data actually
represent the financial records of the gang. In terms of understanding the possible biases in the data, it is worth noting that it served
two purposes: (1) a tool for managing the day-to-day operations of
the gang, much as a CEO relies on management information
systems (MIS) data in a firm, and (2) a means of tracking
operations for reporting to higher levels in the gang hierarchy.
The first purpose suggests that the intention of the data keepers
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we have data is punctuated by a series of violent conflicts between
the group we study and the rivals to the north, culminating with
the eventual seizure of the rival group’s turf, a twelve-square
block area, in the latter part of our sample period. Although
relations with the gang to the south have historically been quite
hostile, there were no major conflicts between these two groups in
the years for which we have data. To the west of this group is
territory controlled by another gang of the same organizational
affiliation. To the east are residential tracts similar in demographic makeup, but with somewhat higher socioeconomic status
and neighborhood cohesion. The area to the east has markedly
lower gang and drug activity throughout the sample.
9. This pilfering takes a number of different forms. First, those who are
responsible for putting the crack into bags for sale on the street report that they
routinely kept some portion for themselves. It was also common practice for
street-level sellers to examine the bags of crack they are responsible for selling,
removing some of the crack from the bags with the largest quantity. Finally, sellers
attempted to engage in price gouging when buyers are suspected of being naive.
Excess proceeds from sales made at an inflated price were unlikely to be reported
back to the gang enforcer. While all of these activities were technically against
gang rules, and were sometimes punished by violent beatings, it appears that they
were nonetheless commonplace.
10. We base this estimate of 15 percent on conversations with a number of
former gang members, although we have no good means of verifying this
magnitude. At most one-third of this skimming would be for personal consumption,
with the remainder either unreported profits or the removal of some of the crack
for later resale.
11. Data for December are missing in three of the four years and represent
half of the missing data in the sample. According to our source, December is a slow
month for drug sales.
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was to accurately capture the gang’s finances, although their
ability to do so effectively may be subject to question. The second
use of the data, however, raises the concern that the scale of
operations and profitability of the enterprise are systematically
understated since high profits are likely to lead to greater
demands for tribute from the gang leadership.
Although the source of the data assures us that is not the
case, we nonetheless believe that it is prudent to view the revenue
and profits as lower bounds on the true values for two reasons.
First, the gang leader had substantial power to make financial
arrangements ‘‘off the books.’’ For instance, during the time period
examined the gang leader received an unknown amount of
compensation from nongang members in return for the right to
sell heroin on the gang’s turf. This income is not recorded in our
data set. Second, the revenue reported reflects only that obtained
by the gang, missing that fraction of the proceeds which is
appropriated by gang members, either for their own use or for
resale. While usage of crack by gang members appears to be low (it
is strongly discouraged by gang leaders), a nonnegligible fraction
of the drugs/drug revenues appear to be pilfered by the low-level
gang members.9 We do not have a good measure of the extent of
such activities, but estimate that at most 15 percent of the
revenues are skimmed by those selling the drugs.10
The data contain monthly breakdowns of the major sources of
revenues and expenditures for the gang. Table II presents monthly
averages for each of the four years covered. Of the 48 months
spanned by our sample, six months of data are missing.11 Averages
are calculated based only on those months for which data are
available. All dollar values are converted into 1995 dollars using
Monthly Averages in 1995 Dollars
Year 1
Year 2
Year 3
Year 4
Total revenues
Drug sales
Extortionary taxes
Total nonwage costs
Cost of drugs sold
Tribute to gang hierarchy
Mercenary fighters
Funerals/payments to families of the
Miscellaneous expenses
Total gang wages
Foot soldiers
Net profit accruing to leader
Monthly wage per foot soldier
Price and quantity of drugs sold:
Data in the table reflect monthly averages for the year listed at the top of the table. Values are based on
monthly data for the four-year period. Data are unavailable for 6 of the 48 months in the sample, with yearly
averages based only on those months with data. Dollar values have been converted into 1995 dollars using the
GDP deflator. All values are rounded to the nearest hundred dollars. Estimates include only revenue sources
included in official gang records. The units on quantity are number of ‘‘bags,’’ an artificial unit of measure that
roughly matches the number of drug transactions that take place. The price is a price per ‘‘bag.’’
a. Detailed information on the breakdown of some cost categories is unavailable for five months of year 3;
all such costs are allocated to the category ‘‘miscellaneous.’’
the GDP deflator. Revenues are broken down into three sources:
proceeds from drug sales (almost exclusively crack-cocaine), dues
from gang members, and ‘‘street taxes,’’ i.e., money extorted from
individuals (and occasionally companies) conducting business on
the gang’s turf. Examples of those required to pay street taxes
would include grocery store owners, gypsy cabs, people selling
stolen goods, and those providing services such as auto or
plumbing repair. Average monthly revenue from all sources for
the gang rose from $18,500 to $68,400 over the period examined.
As noted above, these revenues are best viewed as a lower bound
on the true figures. Proceeds from the sale of crack are the gang’s
major source of income, and growth in drug sales accounts for
virtually all of the increase in revenue over time. Dues collected
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12. This dues structure is unusual. Typically all gang members pay dues. The
value of the dues that foot soldiers avoid could be considered as income. Average
dues, however, are only about $50 per month, so the basic conclusions are
13. Included in miscellaneous expenses are costs for parties, community
events organized by the gang, lawyers’ fees, bribes, etc.
14. For instance, the gang would pay roughly $1500 for the quantity of
cocaine that fits in a ziploc-type sandwich holder.
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from gang members are nearly constant until the final year, when
the gang membership expands dramatically with the expanded
turf. It is important to note that in this gang, core gang members
(i.e., officers and foot soldiers) were not required to pay dues. Only
the peripheral members of the gang (i.e., rank and file) paid these
Although the revenue numbers may appear l