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Detecting Illegal Arms Trade

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  • Stefano DellaVigna
  • Eliana La Ferrara

Abstract

Illegal arms are responsible for thousands of deaths in civil wars every year. Yet, their trade is very hard to detect. We propose a method to statistically detect illegal arms trade based on the investor knowledge embedded in financial markets. We focus on eight countries under UN arms embargo in the period 1990-2005, and analyze eighteen events during the embargo that suddenly increase or decrease conflict intensity. If the weapon-making companies are not trading or are trading legally, an event worsening the hostilities should not affect their stock prices or affect them adversely, since it delays the removal of the embargo. Conversely, if the companies are trading illegally, the event may increase stock prices, since it increases the demand for illegal weapons. We detect no significant effect overall. However, we find a large and significant positive reaction for companies head-quartered in countries where the legal and reputation costs of illegal trades are likely to be lower. We identify such countries using measures of corruption and transparency in arms trade. We also suggest a method to detect potential embargo violations based on stock reactions by individual companies, including chains of reactions. The presumed violations are higher for conflicts with more UN investigations and for companies with more Internet stories regarding embargo.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13355.

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Date of creation: Aug 2007
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Publication status: published as Stefano Della Vigna & Eliana La Ferrara, 2010. "Detecting Illegal Arms Trade," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 26-57, November.
Handle: RePEc:nbr:nberwo:13355

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Cited by:
  1. Bouton, Laurent & Conconi, Paola & Pino, Francisco & Zanardi, Maurizio, 2013. "Guns and Votes," CEPR Discussion Papers 9726, C.E.P.R. Discussion Papers.
    • Laurent Bouton & Paola Conconi & Francisco Pino & Maurizio Zanardi, 2014. "Guns and Votes," NBER Working Papers 20253, National Bureau of Economic Research, Inc.
    • Laurent Bouton & Paola Conconi & Francisco Pino & Maurizio Zanardi, 2013. "Guns and votes," Working Papers 43819146, Lancaster University Management School, Economics Department.
    • Laurent Bouton & Paola Conconi & Francisco Pino & Maurizio Zanardi, 2013. "Guns and Votes," Working Papers ECARES ECARES 2013-39, ULB -- Universite Libre de Bruxelles.
  2. Marion, Justin & Muehlegger, Erich, 2007. "Measuring Illegal Activity and the Effects of Regulatory Innovation: A Study of Diesel Fuel Tax Evasion," Working Paper Series rwp07-026, Harvard University, John F. Kennedy School of Government.
  3. Brian G. Knight, 2011. "State Gun Policy and Cross-State Externalities: Evidence from Crime Gun Tracing," NBER Working Papers 17469, National Bureau of Economic Research, Inc.
  4. Helmut Dietl & Markus Lang & Stephan Werner, 2008. "Corruption in Professional Sumo: An Update on the Study of Duggan and Levitt," Working Papers 0085, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Jun 2009.
  5. Ferrier, Peyton Michael, 2009. "The Economics of Agricultural and Wildlife Smuggling," Economic Research Report 55951, United States Department of Agriculture, Economic Research Service.
  6. Helmut Dietl & Markus Lang & Stephan Werner, 2008. "Corruption in Professional Sumo: An Update on Duggan and Levitt's Study," Working Papers 0824, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Jun 2009.
  7. François-Xavier Delaloye & Michel Habib & Alexandre Ziegler, 2012. "Swiss banking secrecy: the stock market evidence," Financial Markets and Portfolio Management, Springer, vol. 26(1), pages 143-176, March.
  8. William Seitz, 2012. "Stock Market Reactions to Conflict Diamond Trading Restrictions and Controversies," Economics Series Working Papers WPS/2012-22, University of Oxford, Department of Economics.
  9. William Seitz, 2013. "Trade Restrictions and Conflict Commodities: Market Reactions to Regulations on Conflict Minerals from the Democratic Republic of the Congo," OxCarre Working Papers 102, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  10. Janus, Thorsten, 2012. "Natural resource extraction and civil conflict," Journal of Development Economics, Elsevier, vol. 97(1), pages 24-31.
  11. Tandon, Sharad, 2012. "Economic reform, voting, and local political intervention: Evidence from India," Journal of Development Economics, Elsevier, vol. 97(2), pages 221-231.

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