Economics of Illicit Behaviors: Exchange in the Internet Wild West

Julia Norgaard

Major Professor: Thomas Stratmann, PhD, Department of Economics

Committee Members: Bryan Caplan, Alex Tabarrok

Mercatus Center, #4113
April 18, 2017, 10:30 AM to 07:00 AM


The first paper, "Reputation in the Internet Black Market:  An Empirical and Theoretical Analysis of the Deep," is an analysis of the role reputation plays in the Deep Web using data from the Internet black-market site, The Silk Road. This encrypted online marketplace employed cryptocurrency and functioned over the Tor network. Utilizing a modeling technique, informed by trade auction theory, we investigate the effect of seller reputation. Analysis of the seller's reputation gives us insights into the factors that determine the prices of goods and services in this black marketplace. Data on cannabis listings is parsed from the Silk Road website and covers an 11-month time period, from November 2013 to October 2014. This data demonstrates that reputation acts as a sufficient self-enforcement mechanism to allow transactions. These findings exemplify the robustness of spontaneous order with respect to the Deep Web as an emergent marketplace.


The second paper, "Overcoming Anonymity:  How Internet Black Markets Enable Encrypted and Anonymous Exchange," examines how the platform providers in the Internet Black Market, one of the world’s largest international markets for illicit goods and services, allow buyers and sellers to overcome the problems anonymity poses to exchange.  These online markets provide private governance which enables users to repeatedly exchange in an environment with no third party enforcement while keeping their identify concealed from law enforcement. 


The final paper, "Shadow Markets and Hierarchies:  Comparing and Modeling Networks in the Dark Net," analyzes the determinants of network structure and hierarchy by examining various black market networks.  We examine structures of networks in the Internet Dark Net (virtual) using an agent-based model and compare it to network structures of traditional black markets (ground), also laid out using agent-based modeling.  The purpose of modeling these two different types of illicit markets is to understand the network structure that emerges from the interactions of the agents in each environment.  Traditional black markets are relatively hierarchical, with high degree and high betweenness. We compare the density and average length of shortest path of the simulated ground black market networks with our simulated virtual network.  We find that hierarchy in networks is a product of differences in transaction costs and information asymmetries.  The Internet is an effective way to lower both of these aspects of network structure.  We observe that the network structure surrounding the interactions in the virtual black market is less hierarchical than the network structure of the ground market.