The Economics of the War on Illegal Drug Production and Trafficking | 2013

 Joint with Daniel Mejia

 Forthcoming Journal of Economic Behavior and Organizations

We model the war on drugs in source countries as a conflict over scarce inputs in successive levels of the production and trafficking chain, and we examine how policies aimed at different stages affect prices and quantities in upstream and downstream markets. Using the model we study Plan Colombia; a large intervention that aims to reduce the downstream supply of cocaine by targeting illicit crops and blocking the transport of cocaine outside this source country. The model fits the main patterns found in the data, including the displacement of the drug trade to other source countries, the increase in the productivity of coca crops as a response to eradication, and the lack of apparent effects in consumer markets. We use a reasonable parametrization of our model to evaluate the cost-effectiveness of several policies implemented under Plan Colombia. We find that the marginal cost to the U.S. of reducing cocaine transacted in retail markets by one kilogram is $940,000 if it subsidizes eradication efforts and $175,000 if it subsidizes interdiction efforts in Colombia.