US Interstate Underground Trade Flow: A Gravity Model Approach

Forthcoming at the Review of Law & Economics

27 Pages Posted: 3 Jun 2015 Last revised: 11 Oct 2016

See all articles by Travis Wiseman

Travis Wiseman

Mississippi State University - Department of Finance and Economics

Paul Walker

West Virginia University - Department of Economics

Date Written: July 1, 2016

Abstract

In this paper we model interstate trade in US shadow economies using a traditional gravity model, updated to control for factors that encourage (discourage) underground exchange among formal sector trading partners. Using data on interstate trade flow from the US Census Bureau, and state-level shadow economy size estimates from Wiseman (2013), we develop a first-ever estimate of interstate underground trade flow (UTF) for the US. Using a UTF ratio, measured as the portion of state i’s aggregate value of underground exports flowing into state j, we investigate the relationship between UTF and policy governing marijuana consumption in each state. Results suggest a negative (positive) relationship between the UTF ratio and marijuana decriminalization when state i (state j) is the only state among trading partners to relax its regulation. Additionally, when both trading partners decriminalize marijuana consumption, this relationship is positive. This may suggest that states recognize an increased cost to exporting underground goods to states where the good is prohibited; when the rules make it quasi-legal to produce and sell at home. Alternatively, states that decriminalized marijuana appear to increase their consumption of underground imports (or at least the value of those imports) all around.

Keywords: shadow economy; illicit trade; gravity model; regional; U.S. states

JEL Classification: K49; O17; O51; R11

Suggested Citation

Wiseman, Travis and Walker, Paul, US Interstate Underground Trade Flow: A Gravity Model Approach (July 1, 2016). Forthcoming at the Review of Law & Economics, Available at SSRN: https://ssrn.com/abstract=2613152 or http://dx.doi.org/10.2139/ssrn.2613152

Travis Wiseman (Contact Author)

Mississippi State University - Department of Finance and Economics ( email )

Mississippi State, MS 39762
United States

Paul Walker

West Virginia University - Department of Economics ( email )

Morgantown, WV 26506
United States

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