Santiago Montoya-Blandón, Andrés Ramírez-Hassan
arXiv 25 Mar 2025 · Econometrics
arXiv:2503.20100 · PDF · DOI · OpenAlex · Extracted main text
The response of illicit drug consumers to large-scale policy changes, such as legalization, is heavily mediated by their demand behavior. Since individual drug use is driven by many unobservable factors, accounting for unobserved heterogeneity is crucial for modeling demand and designing targeted public policies. This paper introduces a finite Gaussian mixture of Exact Affine Stone Index (EASI) demand systems to estimate the joint demand for marijuana, cocaine, and basuco (cocaine residual or "crack") in Colombia, accounting for corner solutions and endogenous price variation. Our results highlight the importance of unobserved heterogeneity in identifying reliable price elasticities. The method reveals two regular consumer subpopulations: "safe" (recreational) and "addict" users, with the majority falling into the first group. For the "safe" group, whose estimates are precise and nationally representative, all three drugs exhibit unitary price elasticities, with cocaine being complementary to marijuana and basuco an inferior substitute to cocaine. Given the low production cost of marijuana in Colombia, legalization is likely to drive prices down significantly. Our counterfactual analysis suggests that a 50% price decrease would result in a $363 USD gain in utility-equivalent expenditure per representative consumer, $120 million USD in government tax revenue, and a $127 million USD revenue loss for drug dealers. Legalization, therefore, has the potential to reduce the incentive for drug-related criminal activity, the current largest source of violent crime in Colombia.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Lewbel, Arthur and Pendakur, Krishna (2009) Tricks with Hicks: The EASI demand system | 0.950 | 7 | 5 | 86% |
| 2 | Zhen, Chen and Finkelstein, Eric A. and Nonnemaker, James M. and Kar… (2014) Predicting the effects of sugar-sweetened beverage taxes on food and beverage demand in a large demand system | 0.928 | 4 | 3 | 100% |
| 3 | Anderson, D Mark and Rees, Daniel I (2023) The public health effects of legalizing marijuana | 0.811 | 4 | 2 | 100% |
| 4 | Ramírez-Hassan, Andrés and Gomez, C and Velasquez, Santiago and Tang… (2023) Marijuana on Main Streets? The Story Continues in Colombia: An Endogenous Three-part Model self | 0.811 | 4 | 2 | 100% |
| 5 | Ramírez-Hassan, Andrés (2021) Bayesian estimation of the exact affine Stone index demand system: Replicating the Lewbel and Pendakur (2009) results | 0.737 | 3 | 2 | 100% |
| 6 | J. Banks and R. Blundell and A. Lewbel (1997) Quadratic Engel curves and consumer demand | 0.644 | 2 | 2 | 100% |
| 7 | A. Deaton and J. Muellbauer (1980) An almost ideal demand system | 0.644 | 2 | 2 | 100% |
| 8 | Kasteridis, Panagiotis and Yen, Steven T. and Fang, Cheng (2011) Bayesian estimation of a censored linear almost ideal demand system: Food demand in Pakistan | 0.644 | 2 | 2 | 100% |
| 9 | Ramírez-Hassan, Andrés and López-Vera, Alejandro (2024) Welfare implications of a tax on electricity: A semi-parametric specification of the incomplete EASI demand system | 0.644 | 2 | 2 | 100% |
| 10 | Jacobi, Liana and Sovinsky, Michelle (2016) Marijuana on main street? Estimating demand in markets with limited access | 0.644 | 2 | 2 | 100% |
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