Social and Behavioral Sciences Commons^™

The Economics Of Counterfeiting, Elena Quercioli, Lones Smith

Economics and Finance Faculty Publications and Presentations

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