“Displacement in the Criminal Labor Market: Evidence from Drug Legalizations”

Legalizing drugs harms some black markets but spurs activities in others:

It is widely hypothesized that legalization disrupts illicit markets and displaces illegal suppliers,  but the consequences for those who are displaced remain poorly understood. In this paper, I use comprehensive administrative data from three states that legalized marijuana covering all individuals released from prison in the years immediately before and after the policy change to estimate the effect of legalization on the subsequent criminality of convicted dealers. I find that marijuana legalization increased the 9-month recidivism rate of marijuana offenders by 6 percentage points relative to a baseline rate of 10 percent. The increased recidivism is largely driven by a substitution to the trafficking of other drugs, which is consistent with a Becker-style model where individuals develop human capital specific to the drug industry. To learn about potential mechanism behind these results, I use detailed drug transaction price data to estimate the effect of legalization on average prices and price dispersion, and I find suggestive evidence that both the average level and residual variance decline following legalization, which is consistent with legalization eroding rents earned in the illicit marijuana market. Lastly, I explore the generalizability of my findings in a distinct legalization experiment from history: the end of National Prohibition. I replicate the main insights at an organizational level and show that, in response to the repeal of Prohibition, the Italian-American Mafia shifted personnel from bootlegging to narcotics. Overall, the results in this paper suggest that an unintended consequence of drug legalization is a re-allocation of drug criminals to other illicit activity.

That is from Heyu Xiong, who is currently on the job market from Northwestern.


The abstract mentions that the author examined price behavior in the still-prohibited adjacent markets. I guess this means that prices go down because of the increased competition. And what about more violence to defend rent position in those market-places?

Any thoughts on the violence in Mexico when Mexico decriminalized?


Should've checked to see if wages were driven down in vegetable hydroponics and off-grid solar installation labor markets.

(They get good at rigging solar panels up so they electricity bills won't look suspicious from all the lighting required to grow cannabis indoors. Of course, in Australia, the police check aerial photos for suspicious off-grid solar installations...)

"increased recidivism is largely driven by a substitution to the trafficking of other drugs".

What does substitution means here? If substitution means marijuana sales income going from 40% to 0% for a dealer, it's fine. If it means that a dealer only sold marijuana before and after legalization switched to selling harder drugs, it's a bit naive.

I have never met a dealer who only sells marijuana and not amphetamines, tranquilizers and more stuff, or offers to get it if it's not on stock.

This made me wonder. When the duty on imported tea was reduced to almost zero how did the tea-smugglers of Boston react? Apart from staging the Tea Party, I mean. Did they start smuggling other stuff, and if so what?

This author might be the very fellow to answer the question.

Amazing, it is like I have been calling this for years. Far from being defeated by the repeal of prohibition, the mob grew more powerful throughout the 30s, 40s, and 50s.

Drug policy needs to be about what the people at the bottom of society will actually do and experience. That means we should expect criminals to keep using their human capital in criminal endeavors. We should expect people with poor impulse control to continue to have such. We should expect individuals whose consumption is limited by price to increase consumption.

Maybe legalization is a net win. Maybe liberty is such a primary concern we should do it regardless of the costs.

Let's just have our debates with reality in mind. Legalization will, at best, have only marginal improvements in crime. Heavy users will become heavier users. Access for children will increase. And the wealthy will be able to toke up with less petty annoyance.

Sure -- thanks for this post. In Missouri, there are 3 proposals on the upcoming ballot supporting the legalization of "medical" marijuana. Getting a prescription will be as easy as certifying an emotional support animal.

And opioid abuse will decline, and Missouri tax revenue will increase.

Did I miss a study? The best I recall having seen is opioid use not climbing as fast in ecological studies. Of course the fact that legalization states have been different than those for opioid abuse on many levels makes ecological studies a bit hard to generalize from.

The other question I have is the mechanism. I could buy marijuana was used instead of abusing prescription painkillers. However, the the rate of people getting hooked via prescription drugs has drastically reduced and seems unlikely to be a path for substantial harm reduction going forward.

I am not at all convinced that tax revenue will climb. After all we were promised that with the lottery, which somehow needed to have advertising and then casinos which pretty much every analysis I have ever seen suggests that without being destination gambling is a net drain on the economy. Sure things seen will be a fat check of marijuana taxes, but things unseen will almost certainly see reduced employment and possibly increased long term disemployment depending on what dominates.

Could be wrong, but if marijuana actually unambiguously does both of those, it will be the first vice industry to be a net benefit ... ever.

Yup. Dudes that don't want to work at McDonalds and will stab someone over "getting dissed" aren't going to magically change because pot is legal.

More plainly stated, crime policy needs to be about criminals.

We used to have a very simple and highly effective policy called "Find them and keep them in prison."

But no, can't do that any more. Not in these Enlightened Times.

Another failure of Trump.

I fear the mob every day of my life!!! They're soooo powerful! The mob stopped selling alcohol which was a huge market and was a crime that had support from a good deal of the population. You're more likely to see an Italian lawyer than an Italian mobster nowadays.

These people aren't going to up and turn straight right away but the markets smaller. So they either have to go to higher risk, less socially acceptable crime or go straight. Selling heroin and amphetamines isn't going to be as profitable as selling alcohol and pot. Kidnapping people for ransom or burglarizing is a much riskier line of business that not all pot dealers are up for.

In the 30s the mob was an issue for you if you drank. In the 50s it was an issue if you were part of organized labor or if you owned a small business. By far more innocent people were killed by the post-Prohibition Mafia than the Prohibition one.

The Commission was far more deadly to the general populace than the old mafia ever was. Likewise, more money was made of gasoline tax fraud than all the money from bootlegging in the 20s.

How much of the increase in recidivism rate could be that the police has more time and resources to go after other drugs?

the police has more time and resources to go after other drugs?

A significant portion of time and resources are evidently devoted to the solution of unsolved "cold cases" from decades past that regularly make headlines as if they were somehow going to make a difference in our current day-to-day life. On the other hand, the investigators working on those cases may very well be cops incapable of performing other duties or hanging around in the last days before retirement. We don't get a count of the cold cases that are investigated and never solved and the resources that are expended in those futile efforts.

Some of this will hopefully be transitory / just one generation. The next generation has not developed human capital specific to the drug industry. This may make the industry less attractive to enter for future generations.

How many times have we heard the marijuana is a gateway drug argument? Seems almost more true for dealing than consuming. Hopefully this means, as you said, that the next generation will dissipate some of the effects talked about in the paper. Another effect that I haven't seen discussed is the human capital lost (spent?) by having a felony on your record. Once that happens your options are limited.

It wasn't last time.

The Commission era Mafia had more people involved in crime than Al Capone and all the Prohibition era mobsters ever dreamed of getting involved. Ending Prohibition did nothing to stop the long term rise of the Mob. What did in the mob was affluence for the next generation and above all RICO and other law enforcement options.

We do not now how powerful the mafia would have been had prohibition continued. The activities they later became involved in may not be mutually exclusive with alcohol bootlegging.

And conversely we do not how powerful the mafia would have gotten had we avoided prohibition.

After all the original racket for the mafia was extortion of lemon growers. Italy, never having had prohibition has always had higher concentration of mafia activity. In Sicily it was eventually cigarette smuggling which became their most lucrative racket. In Naples the current most lucrative racket is waste dumping.

Most of the world never had prohibition and most of the mafia rackets have not been to sell contraband. Even when they do sell contraband the most common racket is not something wholesale illegal, but merely avoiding taxation.

As I said before, legalization may have some marginal changes in crime rates, but the core skill set for organized crime is not moving illicit goods it is simply working in an extra-legal environment using extra-legal means. Violence, corruption, intimidation, and avoiding jail are the core competencies and the world has shown a pretty healthy return on them even absent obvious contraband opportunities.

Legalization is mostly about decriminalizing usage of drugs

Millions of people who use but do not deal will be beneficially impacted by legalization. Dealers are ... well usually not good people from my limited contact so it’s not surprising that they will continue their criminal activity.

But don’t lose sight of the big picture: marijuana legalization is aimed at the 10s of millions of casual users who smoke pot at the risk of a criminal record.

Decriminalization accomplishes this. It's different from legalization. Even places that are often talked about as examples of legalization are actually examples of decriminalization (Portugal). As you say it's more of a change in enforcement strategies to target dealers versus users. It doesn't make it OK for mega corps to sell pot anyway they can.

Serious question, why is it ok for mega corps to sell alcohol any way they can, when it's a more dangerous drug than pot? My thought is it's mainly because we have evolved cultural norms around alcohol consumption so it's not scary like pot. Well, in places with legal marijuana (Netherlands, etc) the norms have evolved and the problems of pot use are less than alcohol use.

Maybe we should make alcohol illegal and pot legal, let the criminals bootleg instead. The poster above named Sure should be in favor of that tradeoff (if we must have one or the other legal).

I would take that trade under the caveat that evidence might flip it later.

Pot, unfortunately, will be like any other vice industry. One or another soulless multinational corporation will find a way to make a few more bucks by irresponsible/quasi-illegal practices.

I fear Philip-Morris much more than I do drug dealers.

But how much "illicit activity" is there other than drugs? It seems to me that you legalized all drugs and all forms of gambling then criminals would have few alternatives.

Importantly, it ought only shift to other forms of illicit activity *with comparable human capital requirements*. If you legalize all drugs, you won't necessarily shift criminality to say, extortion.

Of course not. The historical example includes racketeering, tax fraud, bid fixing, grand theft, prostitution ... and basically everything else.

The core skillset is not moving contraband it is using extralegal means of business and avoiding the typical punishment for that. That works for most any criminal endeavor.

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