Econometrica: May, 2015, Volume 83, Issue 3

The Economics of Counterfeiting

https://doi.org/10.3982/ECTA10975
p. 1211-1236

E. Quercioli and L. Smith

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.