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US Interstate Underground Trade Flow: A Gravity Model Approach

Author

Listed:
  • Wiseman Travis

    (Department of Finance and Economics, Mississippi State University, 210 McCool Hall, Mississippi State, MS, USA)

  • Walker Paul

    (College of Business and Economics, Department of Economics, West Virginia University, 1601 University Avenue, Morgantown, WV 26506, USA)

Abstract

In this paper we model interstate trade in US shadow economies using a traditional gravity model, updated to control for factors that encourage (discourage) underground exchange among formal sector trading partners. Using data on interstate trade flow from the US Census Bureau, and a unique dataset measuring US state-level shadow economy size, we develop a first-ever estimate of interstate underground trade flow (UTF) for the US. Using a UTF ratio, measured as the portion of state i’s aggregate value of underground exports flowing into state j, we investigate the relationship between UTF and policy governing marijuana consumption in each state. Results suggest a negative (positive) relationship between the UTF ratio and marijuana decriminalization when state i (state j) is the only state among trading partners to relax its regulation. Additionally, when both trading partners decriminalize marijuana consumption, this relationship is positive. This may suggest that states recognize an increased cost to exporting underground goods to states where the good is prohibited; when the rules make it quasi-legal to produce and sell at home. Alternatively, states that decriminalized marijuana appear to increase their consumption of underground imports (or at least the value of those imports) all around.

Suggested Citation

  • Wiseman Travis & Walker Paul, 2017. "US Interstate Underground Trade Flow: A Gravity Model Approach," Review of Law & Economics, De Gruyter, vol. 13(2), pages 1-25, July.
    • Handle: RePEc:bpj:rlecon:v:13:y:2017:i:2:p:25:n:7
    DOI: 10.1515/rle-2015-0057
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    References listed on IDEAS

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    1. Schneider Friedrich, 2010. "The Influence of Public Institutions on the Shadow Economy: An Empirical Investigation for OECD Countries," Review of Law & Economics, De Gruyter, vol. 6(3), pages 441-468, December.
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    5. Chaudhuri, Kausik & Schneider, Friedrich & Chattopadhyay, Sumana, 2006. "The size and development of the shadow economy: An empirical investigation from states of India," Journal of Development Economics, Elsevier, vol. 80(2), pages 428-443, August.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    shadow economy; illicit trade; gravity model; regional; US states;
    All these keywords.

    JEL classification:

    • K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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