Cocaine: The Complementarity Between Legal and Illegal Trade


  • I would like to thank Tullio Jappelli, Larry Kotlikoff, Robert Margo, Laura Moretti, Andy Newman, Daniele Paserman, Adrien Verdelhan, two anonymous referees and the seminar participants at the CSEF and at the ME@VELIA for helpful comments on earlier drafts. All remaining errors are mine.


I show that the decreased price of cocaine in its major destination markets is partly explained by a lower smuggling cost, which is itself the consequence of an increased international trade in legal goods. First, because more legal imports are associated with a bigger number of transporters and therefore with a bigger supply of potential drug smugglers. Second, because, as the number of legal shipments grows, the individual inspection probability decreases, lowering the risk born by the smugglers and thus their compensation. The cocaine market provides evidence of a complementarity between legal and illegal trade.