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The Economics of Counterfeiting
Author(s) -
Quercioli Elena,
Smith Lones
Publication year - 2015
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta10975
Subject(s) - counterfeit , comparative statics , mathematical economics , computer science , quality (philosophy) , set (abstract data type) , game theory , microeconomics , economics , operations research , mathematics , law , political science , physics , programming language , quantum mechanics
We develop a strategic theory of counterfeiting as a multi‐market large game. Bad guys choose whether to counterfeit, and what quality to produce. Opposing them is a continuum of good guys who select a costly verification effort. In equilibrium, counterfeiters produce better quality at higher notes, but verifiers try sufficiently harder that verification still improves. We develop a graphical framework for deducing comparative statics. Passed and counterfeiting rates vanish for low and high notes. Our predictions are consistent with time series and cross‐sectional patterns in a unique data set assembled largely from the Secret Service.