Martin is an Assistant Professor of Law and University of Mississippi. Before entering law teaching, he clerked for the Hon. Leslie H. Southwick of the U.S. Court of Appeals for the Fifth Circuit, served as a Special Assistant Attorney General at the Mississippi Attorney General’s Office, and practiced law at Phelps Dunbar, LLP.
This post is based on a paper that was presented at the 2025 Firearms Law Works-In-Progress Conference. The Conference is held each year on a home-and-away basis with the Duke University Center for Firearms Law. This post also appears on the CFL’s Second Thoughts blog.
The ordinary, regular, and lawful distribution of firearms occurs through federal firearms licensees (FFL’s). This “FFL system” is the backbone of the legal control apparatus for firearms. Other pieces of the regulatory system, such as serialization, record-keeping, and background checks for sales to consumers all rest atop the requirement that all firearms manufacturers, distributors, and retailers must hold an FFL. The Federal Firearms Act of 1938 and the Gun Control Act of 1968 established this requirement, ostensibly to control firearms distribution for crime prevention.
But a strange thing happened along the way to licensing for gun control purposes: The emergence of a unique economic institution for distributing firearms as products. An economic institution is a broad concept that refers to any norm or legal rule that generates regular and orderly economic interactions among people. Economists studying institutions posit that institutions are the key to understanding how the economy works in the real world.
Institutions are likewise a major part of understanding distribution methods for any product in the economy. All product manufacturers face the risk of faithless distributors who will undermine the product’s value by cutting corners or simply failing to make appropriate investments in the value-maximizing distribution of the product. Over time, manufacturers developed sophisticated contractual institutions to deter corner-cutting and to incentivize product-specific investment. In turn, this facilitated manufacturer innovation.
For example, at one time Coors beer was unpasteurized, a significant product innovation. But, for Coors and its ultimate drinkers to enjoy the innovative product, the beer had to remain refrigerated from the time it was brewed to the time the consumer opened the bottle. Since refrigerated transportation and storage is expensive, Coors faced the risk that its distributors would cut corners or refuse to make appropriate investments in keeping the beer cold, which would harm consumers and cause them to blame Coors for making low-quality beer. This, of course, was a threat to Coors’ long-term viability as a product. To solve the problem, Coors created a complex set of institutions including geographic territories and resale price maintenance to incentivize dealers to make investments in proper distribution of the beer. Once made, the investment becomes an asset the dealer does not wish to lose. Fail to refrigerate the beer and lose the investment. This is a strong incentive not to cut corners. With the complex set of distribution restrictions in place, Coors stood in a better position to capture gains from its innovative brewing method.
My working paper from the 2025 Firearms Law Works-in-Progress Conference, The Institution of Firearms Dealing, explores the FFL system as an economic institution. It focuses on how the FFL system’s legal restrictions result in economic restrictions that, perhaps surprisingly, generate reductions in transaction costs inherent in distributing products. Unlike manufacturers of other products, firearms manufacturers have a built-in, legally mandated mechanism for incentivizing product-specific investment: the FFL system. Because any distributor or retailer who wishes to engage in the firearms business must be licensed, the distributor or retailer makes firearms-specific investments to maximize the value of her license. These investments could come in many forms, including storefronts or shooting facilities where consumers can try different firearms or relationships with other dealers to facilitate ease of sales across long geographic distances. These distributor and retailer firearms-specific investments inure to the benefit of manufacturers and consumers, as better distribution is as much a part of any product experience as any other product feature. Moreover, the existence of the system and the firearms-specific investments facilitate innovation in product development. Finally, these investments also represent assets that the dealers do not wish to lose. And it all started with a federal statute passed for the stated purpose of reducing the availability of firearms, at least to those with criminal intentions.
While private contracting institutions are one way that people maximize the economic value of their transactions, sometimes the state can consciously create an institution or set of institutions to solve collective-action problems too large for patchwork private contracts. A notable example of this phenomenon is the Bottled-in-Bond Act of 1897. Manufacturers of bourbon in the late 19th Century faced a problem in their market. “True” bourbon whiskey must be aged for a period of years to obtain its brown color (not to mention its proper flavor). Bourbon “rectifiers” took advantage of consumer confusion by artificially coloring unaged whiskey and passing it off as bourbon. Manufacturers used private techniques such as branding, but they realized that there might be another solution. The U.S. government’s revenue authorities had already created supervised warehouses for aging so that taxes on bourbon could be deferred until the aging process was complete. The Bottled-in-Bond Act built on this system by allowing manufacturers of properly aged whiskey to promote their bourbon as produced under the “supervision” of the U.S. government. Notably, firearms manufacturers did not ask for this the way the late-19th Century Bourbon distillers asked for their government-created institution. Nevertheless, firearms manufacturers now operate under a similar economic institution and enjoy its benefits.
Usually, conversations about the FFL system focus on whether it is working or not in its goal of reducing firearms-related crime or whether it represents too great a burden on law-abiding citizens and businesspeople. My paper takes a different angle, focusing on the firearms-specific investments FFLs make to maximize the value of their licenses. For firearms enthusiasts, these firearms-specific investments have greatly expanded consumers’ ability to obtain firearms and related products. Whether someone simply wants an entry-level handgun for home defense and recreational shooting, or wishes to purchase a basic firearm to modify with all sorts of bells-and-whistles, the FFL distribution model, with its firearms-specific investment incentive, facilitates innovation in production and distribution.
For gun control advocates, the investments deter legal corner cutting and facilitate allocation of enforcement resources for the Bureau of Alcohol, Tobacco, and Firearms (ATF). Any FFL holder who breaks the rules risks losing her license. That means the whole investment goes with it – an additional incentive above and beyond the legal penalties to follow the rules. Of course, firearms law is no stranger to the use of bonding mechanisms to incentivize following gun restrictions. This means that the ATF can focus its resources on dealers who have made less of an investment because they have less to lose. Anecdotal evidence suggests the ATF does tend to prioritize enforcement against smaller dealers with less firearms-specific investment.
The FFL system is the backbone of the legal regulation of firearms. Perhaps by accident, it has become the backbone of the economic distribution of firearms as products. The legal licensure requirement incentivizes firearms-specific investments, which facilitates innovation while solving longstanding transaction-cost problems that exist in many product markets. It also incentivizes legal compliance, as dealers will suffer the loss of their entire investments with the loss of their licenses. The FFL system is always a part of the firearms law conversation and hopefully this paper will contribute to a better understanding of how the system works.