ABSTRACT
The illegality of a product has consequences for the ways in which various participants seek to structure their relationships. The threat of police intervention, either to seize assets or to imprison participants, and the lack of court-enforceable contracts are likely to lead to the formation of small and relatively ephemeral enterprises. The consequence of product illegality, stemming from the costs of asset seizure and arrest, is the need to control the flow of information about participation in the illegal activity. Illegality may raise or lower the incentive for internalizing a function. Illegal markets are frequently characterized by high search costs; it may be time-consuming to acquire an alternative supplier if the existing relationship is interrupted. The planning time horizons of participants in illegal markets is likely to be much shorter than in legal ones. The incentives of illegal workers to demand covert work settings makes it more difficult to monitor their performance.
