Transactions Costs in the Underground Gun Market

Abstract: In the United States it is rare for youths and criminals to buy their guns from licensed dealers, in large part because they would not pass the background check that dealers are required to make. Typically these dangerous people obtain their guns through informal transactions with family, acquaintances, and “street” sources. One result is that the “law of one price” does not apply even within any one jurisdiction – some well-connected criminals find it easy to obtain guns, while other criminals find it difficult and expensive. Transactions costs create a profitable niche for underground brokers and traffickers, although due to legal pressure they tend to be small operators who typically transact with personal connections and sell at low markups. One important implication is that the prevalence of legal ownership influences the likelihood that a criminal will have ready access to a gun (so that the gun percentage in robbery and other violent crimes is closely tied to legal ownership rates). Another implication is that observed transaction prices provide a weak indicator of gun availability in a jurisdiction because a large fraction of potential transactions do not occur due to scarce information. This paper provides relevant evidence on these topics from surveys of offenders, ethnographic research, and administrative data.