a search theoretic model of the retail market for illicit drugs a search theoretic model of the retail market for illegal drugs is developed trade occurs in bilateral potentially long lived matches between sellers and buyers buyers incur search costs when experimenting with a new seller moral hazard is present because buyers learn purity only after a trade is made this model is consistent with some new stylized facts about the drugs market and it is informative for policy design the effectiveness of different enforcement strategies is evaluated including some novel ones that leverage the moral hazard present in the market copyright oxford university press

individual heterogeneity and censoring in panel data estimates of tobacco expenditure a panel of households is used to test the rational addiction model of becker et al 1994 these data raise problems of measurement errors censoring and unobservable heterogeneity we use sample separation information to exclude those households who never purchase tobacco to deal with the remaining zeros we compare specifications based on infrequency of purchase and on censoring gmm and system gmm are used to deal with errors in variables and unobservable heterogeneity within groups two step within groups three step gmm and minimum distance methods are used to allow for censoring there is evidence that the rational addiction specification is sensitive to unobservable heterogeneity and censoring copyright 2002 john wiley sons ltd

what price drug use the contribution of economics to an evidence based drugs policy abstract this paper presents a review of the recent economics literature in the area of illicit drug use particular attention is paid to the economics of addiction and the rational addiction model the welfare economics framework for analysing the social costs of drug use and the attempts that have been made by economists to evaluate recent or proposed policy interventions a dominant theme in this review is the problem of poor data availability this is particularly true when it comes to implementing the rational addiction model but it is also apparent in the literature on estimating the costs of illicit drug use to society as a whole one of the main conclusions of this review is that until recently public policy has not been particularly influenced by research carried out by economists it is not clear whether this is because economists have had to grapple with inadequate data and hence their conclusions are couched in uncertainty or whether it is because drugs researchers have assumed a very limited role for economists in their analysis

price and enforcement effects on cocaine and marijuana demand this article estimates equations for past year cocaine and marijuana use among adult and juvenile respondents of the 1990 97 national household surveys on drug abuse unlike most previous studies we control for the monetary price of marijuana probabilities of arrest for marijuana and cocaine possession and state fixed effects results indicate that cocaine prices are inversely related to adult cocaine and marijuana demand but are unrelated to juvenile drug demand marijuana price effects are always statistically insignificant estimated price effects are inflated when state effects are omitted and increases in each arrest probability diminish both types of drug use jel k42 118 d12 i introduction the responsiveness of cocaine and marijuana demand to changes in their prices is a key determinant of the effectiveness of illegal drug enforcement policy by harassing sellers and seizing drugs enforcement attempts to reduce the consumption of illegal drugs by restricting their supply and thereby raising their prices even if enforcement is able to increase drug prices its success in reducing illegal drug use depends on the elasticity of drug demand with respect to drug prices reciprocally unless this elasticity is close to zero legalization of cocaine and marijuana would likely increase their consumption substantially by drastically reducing their prices a complementary goal of enforcing cocaine and marijuana possession violations is to reduce their demand at prevailing prices this occurs through both incarceration of drug users who will no longer be able to purchase drugs and deterrence of drug consumption by potential users price and enforcement effects may be dissimilar if consumers respond differently to changes in their budget constraints than to changes in expected punishment in particular the relative magnitudes of the responses in drug demand to changes in possession arrest probabilities and prices is an important determinant of how enforcement resources can most efficiently be allocated between buyers and sellers but in spite of this policy relevance there is little direct evidence on the relationship between arrest probabilities for cocaine and marijuana possession and demand for these drugs meanwhile the relationship between the consumption of cocaine and marijuana is both theoretically and empirically uncertain in theory cocaine and marijuana act as substitutes in the production of intoxication but also can provide complementary intoxicating effects empirically this relationship determines whether policies designed to reduce demand for one drug have effects on the other that reinforce or counteract the impacts of policies designed specifically for that other drug for instance marijuana possession arrests more than doubled nationally between 1990 and 1997 both in number and as a fraction of total arrests this might have reinforced any effect of cocaine possession enforcement on cocaine use if the two drugs are complements but had an unintended counteractive effect if they are substitutes this study provides evidence on the impacts of cocaine and marijuana prices and possession violation enforcement on the demand for these drugs we analyze data on past year cocaine and marijuana use among 12 to 39 year old respondents to the annual 1990 97 national household surveys on drug abuse nhsda along with various individual characteristics the set of explanatory variables includes regional prices of cocaine and marijuana state level measures of the probability of arrest for cocaine and marijuana possession and fixed effects for states and years our goals are to estimate the size of the response in the demand for cocaine and marijuana to changes in their prices to do the same with respect to changes in possession violation enforcement intensity and to examine whether unmeasured state characteristics can potentially bias estimated price and enforcement effects

participation in marijuana cocaine and heroin consumption in australia a multivariate probit approach this article investigates factors affecting the participation in marijuana cocaine and heroin using micro unit data from an australian national survey on recreational drugs accounting for cross drug correlation potentially induced by unobserved personal characteristics such as individual tastes and addictive personalities we estimate a trivariate probit model where the participation decisions are jointly modelled as a system with correlated error terms the estimated correlation coefficients are significant across all three drugs the study provides valuable empirical information on conditional and joint probabilities of drug participation the multivariate approach is shown to provide better analysis relative to a univariate approach that does not address the endogeneity of all drug participation variables

an empirical analysis of alcohol addiction results from the monitoring the future panels in a panel of young adults we find that alcohol consumption is addictive in the sense that increases in past or future consumption cause current consumption to rise the positive and significant future consumption effect is consistent with the hypothesis of rational addiction the long run price elasticity is approximately 60 larger than the short run price elasticity and twice as large as the elasticity that ignores addiction thus a tax hike policy to curtail consumption or abuse may not have a favorable cost benefit ratio unless it is based on the long run price elasticity jel 110

the price elasticity of opium in taiwan 1914 1942 abstract between 1895 and 1945 the japanese colonial government virtually eliminated opium use in taiwan by licensing and treating existing users prohibiting sales to others and raising the price we evaluate these policies using a two part model to describe the fraction of the population using opium and consumption among users and the rational addiction model by becker et al 1991 we confirm that opium is addictive and find no evidence supporting the rational addiction hypothesis demand is price elastic with estimated short and long run demand elasticities of 0 48 and 1 38 these results have implications for control of other addictive substances

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

are wages habit forming evidence from micro data although utility functions play a central role in economics the axiom that utility depends only on the absolute levels of its arguments is rarely tested this paper uses panel data on 2000 british employees who remain with the same employer and who are not promoted from one wave to the next it is shown that one important measure of well being overall job satisfaction is strongly positively correlated with the change in the worker s pay between waves but is unrelated to the current level of pay empirical tests suggest that a reference dependent satisfaction function where individual well being depends on current pay relative to past pay is more consistent with these regression results than are productivity or agency explanations of increasing wage profiles some evidence is presented of greater job satisfaction effects of pay rises for lower paid less well educated and younger workers these results provide some micro evidence consistent with the theory widespread in social science of habituation individuals may become used to any given level of consumption or income as such they tie in with the finding that a country s well being as measured by the average happiness of its citizens is only weakly correlated with its per capita gnp

native american obesity an economic model of the thrifty gene theory native american obesity is hypothesized to result from three potential causes 1 a genetic predisposition or the thrifty gene 2 a rational addiction to nutrients and 3 dietary adjustment costs these hypotheses are tested using a two stage household production approach and scanner data from a panel of native and non native supermarkets nutrient intake for both groups is strongly influenced by adjustment costs native americans tend to place higher implicit valuations on protein relative to fats and carbohydrates compared to non natives consequently reductions in real carbohydrate prices over time may be a cause of high incidence of native american obesity

illegal drug use and employment this article investigates the relationship between employment and the use of marijuana and cocaine for males in national longitudinal survey of youth data from 1984 and 1988 previous studies yielding mixed evidence may have inadequately accounted for the simultaneity between drug consumption and employment i implement an instrumental variable procedure that identifies drug use with variables that are empirically unrelated to employment including the regional cocaine price and a state marijuana decriminalization indicator results indicate that the use of each drug substantially reduces the likelihood of employment exogeneity tests reveal that standard probit estimates are severely biased toward zero

the demand for illicit drugs i introduction illicit drug use and alcohol abuse imposes significant costs on society and on the individual users these costs include increased crime health problems and employment problems because of these considerable costs government at all levels has made drug control and the control of alcohol abuse important priorities the federal government has undertaken an aggressive program of interdiction of drug shipments and eradication of drug crops in the field the federal government and the state governments have also increased their criminal justice efforts in analyzing the effect of government drug control programs economists have applied the conventional supply and demand model to illicit drug markets the model includes a demand function that is downward sloping with respect to price and a supply function that is upward sloping or horizontal with respect to price drug programs like interdiction and drug sanctions are assumed to reduce supply and raise equilibrium price other policy options such as some form of drug legalization could increase supply and reduce equilibrium price the effect of these policies on equilibrium quantity is dependent on the elasticity of demand and on whether demand shifts since not much is known about drug price elasticities the potential effects of various drug control policies remain a speculative exercise the purpose of this paper is to estimate the effects of alcohol and drug prices on alcohol use and drug participation both own price and cross price effects are estimated there are few prior empirical studies of the effect of drug prices because data have been difficult to acquire this paper makes use of newly available data on drug prices and is the first paper to link these data to a nationally representative drug use data set of 49 802 individuals estimates of drug price elasticities are important empirical evidence that drug sales can be characterized by market forces drug price elasticities are also important in estimating the likely impact of policies that affect drug prices and in estimating the effects of drug prohibition cross price elasticities are important to estimate since they suggest the likely effects of policies such as an increase in alcohol taxes on illicit drug participation and the effects of marijuana decriminalization on alcohol cocaine and heroin use ii prior studies while there are a number of prior studies of the effects of alcohol prices and policies there are few prior studies of drug prices and polices the reason for so few prior drug studies is the limited amount of data on drug prices and the limited options for linking these data to an individual record by residential area this study uses a new data set of cocaine and heroin prices from the drug enforcement agency that was linked to individual records by the office of applied studies at the substance abuse and mental health services administration leung and phelps 1993 provide a review of a number of recent alcohol demand studies the empirical literature provides considerable evidence that shows increasing the price of alcoholic beverages to decrease alcohol use alcohol demand studies generally estimate price elasticities for beer wine and spirits separately most studies employ aggregate data but a few use individual data studies using aggregate data find price elasticities for beer from about 2 to about 1 0 for wine from about 3 to about 1 8 and for spirits from about 3 to about 1 8 studies using individual data estimate price elasticities for beer from about 5 to about 3 0 for wine at about 5 and for spirits from about 5 to about 4 0 the few prior studies of the effect of decriminalization on marijuana use generally find that marijuana decriminalization has no effect on participation pacula 1994 thies and register 1993 dinardo and lemieux 1992 and johnston o malley and bachman 1981 all used samples of young people and found no effect of marijuana decriminalization

rate of return regulation with price flexibility rate of return regulation is the standard technique used to try to correct for the allocative inefficiencies arising from granting monopolies to firms in industries exhibiting economies of scale the idea behind current practice is that regulators should set an output price such that the firm s profits will provide investors with a fair expected rate of return on invested capital while there has been considerable debate on the appropriate rate of return the modern view as originally expressed by myers 1972 is that the fair rate should be equal to that expected by investors in other firms with equivalent risk this paper considers a change in rate of return regulation that will dominate standard price setting rather than fixing the price that the regulated firm must charge the regulator should grant the firm the option to charge any price less than or equal to a ceiling price hereafter called the price flexibility option if the regulated firm has this flexibility both the consumers and the firm are at least as well off this option to raise and lower prices within a range specified by the regulator will increase the ex ante value of the this paper considers a change in rate of return regulation that will dominate standard price setting rather than fixing the price that the regulated firm must charge the regulator should allow the firm to charge any price less than or equal to a ceiling price we demonstrate the advantages of our proposal and develop a methodology for determining fair regulatory ceilings the methodology explicitly takes account of the effect of regulation on financial risk and we develop a technique for measuring the importance of this effect finally an example is introduced to demonstrate our techniques and to show the potential quantitative importance of the analysis the authors thank alan marcus michael salinger anjan thakor and two anonymous referees for helpful comments it is with great sadness that we report that beth hayes was killed while riding her bicycle shortly after the completion of this paper 1 for a discussion of this debate see brennan and schwartz 1982 p 508

the effects of excise taxes and regulations on cigarette smoking abstract we estimate a generalized linear model to examine adult and teenage cigarette demand our analysis focuses on the extent to which exice taxes and regulations restricting smoking in public places affect cigarette consumption the adult results indicate that the price elasticity of demand is unstable over time ranging from 0 06 in 1970 to 0 23 in 1985 these estimates are lower than most found in previous studies the teenage price elasticity does not differ statistically from the estimates for adults additionally regulations restricting smoking in public places have a significant effect on both adult and teenage cigarette demand

policing cannabis and drug related hospital admissions evidence from administrative records abstract we evaluate the impact of a policing experiment that depenalized the possession of small quantities of cannabis in the london borough of lambeth on hospital admissions related to illicit drug use to do so we exploit administrative records on individual hospital admissions classified by icd 10 diagnosis codes these records allow the construction of a quarterly panel data set for london boroughs running from 1997 to 2009 to estimate the short and long run impacts of the depenalization policy unilaterally introduced in lambeth between 2001 and 2002 we find that the depenalization of cannabis had significant longer term impacts on hospital admissions related to the use of hard drugs raising hospital admission rates for men by between 40 and 100 of their pre policy baseline levels the impacts are concentrated among men in younger age cohorts the dynamic impacts across cohorts vary in profile with some cohorts experiencing hospitalization rates remaining above pre intervention levels three to four years after the depenalization policy is introduced we combine these estimated impacts on hospitalization rates with estimates on how the policy impacted the severity of hospital admissions to provide a lower bound estimate of the public health cost of the depenalization policy

efficiency of purchasing and selling agents in markets with quality uncertainty the case of illicit drug transactions abstract since akerlof s theory of lemons economists have viewed quality uncertainty as an informational advantage for sellers drawing on frontier techniques we propose in this paper a simple method for measuring inefficiency of both sellers and buyers in markets for goods with different levels of quality we apply a non parametric robust double frontier framework to the case of illicit substance markets which suffer from imperfect information about drug quality for purchasers and to a lesser extent for sellers we use unique data on cannabis and cocaine transactions collected in france that include information about price quantity exchanged and purity we find that transactional inefficiency does not really benefit either dealers or purchasers furthermore information influences the performance of agents during market transactions

endangering the war on terror by the war on drugs the united states is currently engaged in two wars one of which is less than a decade old the other has lasted over a century the first the war on terror against islamist fundamentalists began with al qaeda s destruction of the world trade centre s twin towers on sept 11 2001 this led to the us invasion of afghanistan the defeat of the taliban and the dislocation of al qaeda s terrorist infrastructure with osama bin laden and his deputy al zawahari having to flee to the lawless badlands between pakistan and afghanistan with the creation of a democratically elected government under ahmad karzai it might have been thought that the war on terror in afghanistan had been won but as the taliban cum al qaeda scorpion had been squashed but not killed it is now remerging with the resurgence of the taliban and its continuing support for the refurbished al qaeda terrorist network in the southern provinces particularly in helmand of afghanistan this area also happens to be the major poppy growing area in afghanistan for conversion into opium and heroin in 2007 it provided 92 of the world s opium supply whose farm gate value was us 1 billion 1 it is this opium economy which is now as in the past providing the taliban with the money for arms and growing control over the southern opium growing provinces by offering farmers protection from the opium eradication programs spearheaded by the us as part of its war on drugs the first part of this paper

efficient share tenancy contracts under risk the case of two rice growing villages in thailand abstract two categories of thai sharecroppers are observed to be efficient those under high poverty and high risk and those in a long term relation of gift exchange with their landlord econometric estimates show that use of variable factors by these sharecroppers is insignificantly different from that by owner operators and significantly higher than that by generic sharecroppers interpretations for this behavior are provided by models of sharecropping under safety first and of repeated contracts with gift exchange

is the rational addiction model inherently impossible to estimate the rational addiction ra model is increasingly often estimated using individual level panel data with mixed results in particular with regard to the implied rate of time discount this paper suggests that the odd values of the rate of discount frequently found in the literature may in fact be a consequence of the saddle point dynamics associated with individual level inter temporal optimization problems we report the results of monte carlo experiments estimating ra type difference equations that seem to suggest the possibility that the presence of both a stable and an unstable root in the dynamic process may create serious problems for the estimation of ra equations

the demand for cocaine by young adults a rational addiction approach abstract this paper applies the rational addiction model to the demand for cocaine by young adults in the monitoring the future panel the price of cocaine is added to this survey from the drug enforcement administration s system to retrieve information from drug evidence results suggest that annual participation and frequency of use given participation are negatively related to the price of cocaine in addition current participation frequency is positively related to past and future participation frequency the long run price elasticity of total consumption participation multiplied by frequency given participation of 1 35 is substantial

cocaine the complementarity between legal and illegal trade i show that the decreased price of cocaine in its major destination markets is partly explained by a lower smuggling cost which is itself the consequence of an increased international trade in legal goods first because more legal imports are associated with a bigger number of transporters and therefore with a bigger supply of potential drug smugglers second because as the number of legal shipments grows the individual inspection probability decreases lowering the risk born by the smugglers and thus their compensation the cocaine market provides evidence of a complementarity between legal and illegal trade

the price elasticity of hard drugs the case of opium in the dutch east indies 1923 1938 at the beginning of this century the dutch government controlled the opium market in the dutch east indies nowadays indonesia for several decades this state monopoly was called the opiumregie using information gathered during the opiumregie this paper estimates price elasticities of opium consumption it appears that short term price elasticities of opium use are about 0 7 long term price elasticities are about 1 0

the effect of cocaine prices on crime the relationship between cocaine prices and crime has critical implications for u s drug policy but is theoretically indeterminate because cocaine price changes affect crime through changes in both cocaine consumption and expenditures this paper investigates this relationship in annual data from 1981 95 on 29 large u s cities accounting for simultaneity by using two stage least squares with measures of wholesale supply factors and retail enforcement intensity as instruments for cocaine prices controlling for prices of other drugs deterrence socioeconomic factors and city and year specific effects a strong negative relationship exists between cocaine prices and six of seven fbi index crimes

taxation regulation and addiction a demand function for cigarettes based on time series evidence this work analyzes the effects of prices taxes income and anti smoking regulations on the consumption of cigarettes in california a 25 cent per pack state tax increase in 1989 enhances the usefulness of this exercise analysis is based on monthly time series data for 1980 through 1990 results show a price elasticity of demand for cigarettes in the short run of 0 3 to 0 5 at mean data values and 0 5 to 0 6 in the long run we find at least some support for two further hypotheses that antismoking regulations reduce cigarette consumption and that consumers behave consistently with the model of rational addiction

an empirical analysis of milk addiction we show the estimable rational addiction model tends to yield spurious evidence in favor of the rational addiction hypothesis when aggregate data are used direct application of the canonical model yields results seemingly indicative that non addictive commodities such as milk eggs and oranges are rationally addictive monte carlo simulation demonstrates that such results are likely to obtain whenever the commodity under scrutiny exhibits high serial correlation or when even a small amount of the variation in prices is endogenous or when overidentified instrumental variables estimators are used or when commonly imposed restrictions are employed we conclude that time series data will often be insufficient to differentiate rational addiction from serial correlation in the consumption series