Designing Policy in Weak States: Unintended Consequences of Alcohol Prohibition in Bihar

Abstract

We study the impact of an alcohol-prohibition policy on crime in the Indian state of Bihar, where nearly 1.5 percent of the world's population lives. Using a difference-in-difference empirical strategy, we show that banning the sale and consumption of alcohol led to an increase in crime, even after adjusting for prohibition-related cases. The rise in violent and property crime is highest in districts with greater black-market prices of country liquor. Since state capacity and supply of police is fixed, diverting law enforcement resources towards implementing the alcohol ban effectively reduces institutional bandwidth to prevent crimes. The findings can be reconciled with a model where crime is deterred by both police enforcement and collective action. In places where public support for the policy was strongest, we find that the rise in crime was the smallest. Our results caution against `big-bang reforms' in states with weak institutions.

Keywords: Alcohol prohibition, crime, collective action

JEL Classification: D74, D78, K42, O17