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Cocaine: The Complementarity Between Legal and Illegal Trade

The smuggling cost of an imported illegal good decreases as the volume of legally imported goods increases. First because more imports are typically associated to an increased number of transporters, which is an increased supply of potential smugglers. Second because, as the number of shipments increases, the individual inspection probability decreases, lowering the risk born by the smugglers and thus their compensation. I test this theory using data on the market for cocaine, finding empirical support: in a panel of countries, an increased volume of imports is robustly associated to a decreased price of cocaine. Legal and illegal trade appear to be complementary.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 253.

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Date of creation: 03 Jun 2010
Publication status: Published in The World Economy, 2014, 37(9), pp. 1290-1314
Handle: RePEc:sef:csefwp:253
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