Tuesday, May 26, 2009

Steven Levitt - economics of crack dealing similar to McDondalds

This is a classic talk by Steven Levitt, the co-author of Freakonomics discussing the financial structure of a crack dealing gang. He shows similarities to the way McDonalds is organized and compensated (except for a few minor details such as life expectancy). Some amazing concepts observable in a drug dealing gang:
  • Franchising structure
  • Compensation similar to a corporation:
  1. $3.50/ for foot soldiers
  2. $100K/year manager
  3. $200K/year regional leader
  4. $400K/year board of directors
  • Cycle similar to the doc-com era. Earlier guys became wealthy - the rest just worked for "stock options" that never materialized.
  • "Compensating differential" concept works in drug gangs (during wars members get higher pay).
  • Game theory (Nash Equilibrium)
  • Gang leader gets paid even during worst times ("weak n' shit" hypothesis). Similar to corporate CEOs.
This is from Ted.com. Enjoy!

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