Markets for prohibited goods, specifically illegal drugs, exist, despite extensive efforts to suppress them. The intention of prohibitionist policies is to eliminate the market for a particular good(s). In order to remain in the market, prohibition entrepreneurs have the incentive to figure out ways of minimizing the costs of doing illegal business (the costs required to evade law enforcement and consideration of the cost and likelihood of punishment), as well as establishing and maintaining institutions that promote cooperation where formal property rights are not provided. This chapter suggests that because illegal markets are forced outside of the traditional property rights-based institutional arrangement and are faced with continuing efforts, on the part of the government and law enforcement, to stifle and eliminate the illegal markets, entrepreneurial efforts within illegal markets will be channeled towards protective innovations that allow these entrepreneurs to remain in business. In an effort to evade law enforcement and maintain governance in the face of government intervention, both of which are necessary in order to remain in business, illegal entrepreneurs must trade off against productive entrepreneurial endeavors when they act as protective entrepreneurs. As protective entrepreneurs discover new methods by which to innovate, they will be shaped by the entrepreneur’s knowledge and the environment within which the entrepreneur is acting. This can help to explain why illegal and legal drugs diverge on margins including the use of violence and advances (or lack thereof) in product quality.