Marijuana legalisation and the displacement of drug dealers

What do marijuana dealers do when their illegal product become legal? Perhaps they become legitimate business people, and open a store. However, they have a particular set of skills that is more aligned with criminal enterprise than with legitimate retail, so perhaps they move into selling other illegal goods, like harder drugs. That is the question that Heyu Xiong (now at Case Western Reserve University) addresses in his 2018 job market paper, which as far as I can tell, has not yet been published.

The research question, of how drug dealers respond to legalisation, is important, particularly in countries that have yet to legalise such as New Zealand. The idea that legalisation simply eliminates criminal activity is overly simplistic, and that is exactly what Xiong finds. He uses data on prison admissions and releases from three U.S. states that have legalised marijuana (Colorado, Washington, and Oregon) over the period from 2000-2016 (for Colorado and Washington) or 2007-2017 (Oregon). He looks at the recidivism rate for those convicted of marijuana-related crime before and after legalisation, using several different methods and several comparison populations. He finds that:

...state adoption of marijuana legalization is associated with a significant increase in the risk of recidivism for marijuana dealers. Following legalization, marijuana offenders become 4 to 5 percentage points more likely to re-enter prison within 9 months of release. The effect is sizable, corresponding to a near 50% increase from a baseline rate of 10 percent. When decomposed by crime categories, I find the overall increase masks two countervailing effects. One, marijuana offenders became less likely to commit future marijuana offenses. Two, this reduction is offset by the transition to the trafficking of other drugs. As a result, the observed criminality of former marijuana traffickers increased. Because participation in other type of crimes did not vary significantly, the revealed patterns are consistent with the importance of drug-industry specific human capital in explaining the persistence of criminal choices.

So, marijuana legalisation doesn't reduce crime by marijuana dealers, but increases it. There were significant increases in offences related to other (harder) drugs, and a smaller (but still significant) increase in property crime. Why did that happen? Xiong notes that:

...a 1% increase in marijuana crime within the county corresponds to a .2% increase in number of establishments...

The spatial pattern of entry reveal that legal dispensaries entered precisely in locations where illegal dealers operated. Given their close proximity, this implies that legal entrants directly competed with the incumbent illegal dealers. Hence, illegal retailers was supplanted by legitimate trade.

It should be no surprise that the legitimate marijuana sellers would want to locate in the places where demand is highest, which just happens to be where the drug dealers were previously located. Xiong also finds that:

...the retail prices of marijuana dropped significantly following legalization. Additionally, owing to the large-scale legal entry and lower search frictions, much of the within-state price dispersion disappeared.

The combination of lower (and more stable) prices suggests that competition in the market was high. That competition, especially being in the neighbourhood of the drug dealers, pushed the drug dealers out of the market, and they had to find something else to do. Xiong also finds that they don't shift into legal work. Looking at whether the offenders use employment services after they are released, he finds only a:

...small effect on utilization of these employment services, even amongst sub-populations consisting only of people who are eligible and have not returned to incarceration. With the NLSY data, I fail to detect any increase in weeks worked or income from wages. Altogether, the transition to legitimate employment resulting from criminal displacement is evidently low.

Overall, this paper is helpful in thinking about the issues, and the costs and benefits, associated with marijuana legalisation. While legalisation has many evident benefits, not least a reduction in the amount of resources devoted to policing the illegal market, that must be weighed up against the costs. Those costs may include the diversion of marijuana dealers into the selling of harder drugs that come with higher social costs.

[HT: Marginal Revolution, back in November 2018]