Optimal Drug Policy in Low‐Income Neighborhoods

• Author: PING WANG,N. EDWARD COULSON,SHENG‐WEN CHANG
• DOI: http://doi.org/10.1111/jpet.12147
• Date: 01 October 2016
• Published date: 01 October 2016

OPTIMAL DRUG POLICY IN LOW-INCOME NEIGHBORHOODS

SHENG-WEN CHANG

National Chengchi University

N. EDWARD COULSON

University of Nevada, Las Vegas

PING WANG

Washington University in St. Louis and NBER

Abstract

The control of drug activity currently favors supply-side policies: drug

suppliers in the United States face a higher arrest rate and longer sen-

tences than demanders. We construct a simple model of drug activity

with search and entry frictions in labor and drug markets. Our calibra-

tion analysis suggests a strong “dealer replacement effect.” As a result,

given a variety of community objectives, it is beneficial to lower sup-

plier arrests and raise the demand arrest rate from current values. A

10% shift from supply-side to demand-side arrests can reduce the pop-

ulation of potential drug dealers by 22–25,000 and raise aggregate local

income by $380–$400 million, at 2002 prices.

1. Introduction

The prevalence of drug trafficking and use continue to be of significant and increas-

ing policy concern in the United States. Evidence of this comes from the fact that

spending on all forms of domestic drug control by the U.S. government has increased

over the period 1996–2007 by almost 66% in real terms.1Those who are arrested and

1http://www.whitehousedrugpolicy.gov/publications/policy/budgetsum04/drug control.pdf (Office

of National Drug Control Policy, National Drug Control Strategy).

Sheng-Wen Chang, Department of Public Finance, National Chengchi University, Taipei, Taiwan

(email: sxc240@nccu.edu.tw). N. Edward Coulson. Department of Economics and Lied Institute for

Real Estate Studies, University of Nevada, Las Vegas, NV 89154 (n.edward.coulson@gmail.com)

Edward Coulson, Department of Economics and Lied Institute for Real Estate Studies, University of

Nevada, Las Vegas, NV 89154 (email: n.edward.coulson@gmail.com).

We are grateful for the helpful comments of Marcus Berliant, Eric Bond, John Conley, Rafael Di

Tella, Steven Durlauf, Sebastian Edwards, Mike Grossman, Bob Helsley, Derek Laing, Antonio Merlo,

Wan-Shiang Pan, Jennifer Reinganum, Koji Shimomura, Norm Skoufias, Alison Watts, and Federico

Weinschelbaum, as well as seminar/conference participants at Kobe, Southern Illinois, Vanderbilt,

Washington (St. Louis), the Association for Public Economic Theory Conference, the Midwest Eco-

nomic Theory Meetings, the NBER Inter-American Conference on Crime, Institutions And Policies,

the Regional Science Association International Meetings, and the Taipei International Conference

on Public Economics. The third author acknowledges financial support from NIH/NIAAA grant

(1R01-AA11657) and the Weidenbaum Center on Economy,Government and Public Policy grant.

Received March 16, 2014; Accepted December 12, 2014.

C2015 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (5), 2016, pp. 726–751.

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Optimal Drug Policy 727

2 3 4 5

ratio

1980 1990 2000 2010

year

Figure 1: Ratio of arrests for drug possession to arrest for sale/manufacture 1982–2007.

Source: Derived from U.S. Department of Justice, Bureau of Justice Statistics, Drug and Crime

Facts. http://www.ojp.usdoj.gov/bjs/dcf/tables/salespos.htm

prosecuted can be segmented into two broad categories: those arrested for the sale

and/or manufacture of drugs, and those arrested for possession. We will, for conve-

nience, characterize these two types of arrests as supply-side and demand-side arrests,

and efforts to concentrate on one type of arrest or another as supply- or demand-side

policies.2

The mix of supply-side and demand-side policy has shifted over the years. Figure 1

displays the ratio of possession arrests in the United States to arrests for sale and manu-

facture for the past two and a half decades. Through the 1980s a shift toward supply-side

policy was undertaken as the ratio fell from nearly 4:1 down to 2:1; since 1991, however,

there has been a consistent shift toward demand-side arrests, and to the point where

in 2007 the ratio stands at almost 4.7:1.3The sentencing patterns are quite different

for demanders and suppliers. In 2002, drug suppliers in the United States face an av-

erage arrest rate of 3% and an average sentence of 3.6 years, while drug demanders’

arrest rate is only one sixth (0.5%) with a sentence that is about half of drug suppliers

(1.83 years).

Demand-side policies generally have their critics—indeed the whole notion of a

“war on drugs” is broadly criticized—but some scholars have advocated policies more

oriented toward the demand-side in place of supply-side policies. Among these is

Meares (1998), who recommends the so-called “reverse sting” operation, where law en-

forcement officials pose as drug sellers in order to gather evidence on buyers, rather

than the usual method of posing as buyers to arrest dealers. While not denying that

2The analysis in this paper can be applied to many illicit goods. Our focus on drugs is due to the policy

relevance and the ability to undertake a quantitative simulation.

3The data also suggest a stronger focus on selling and distributing more harmful drugs. While cocaine

accounted for about half of the total retail sales of illegal drugs, it accounted for more than two-thirds

of the supply-side incarcerations.