Marijuana Liberalization and Public Finance: A Capital Market Perspective on a Public Health Policy

Abstract

Marijuana liberalization in the U.S. has gathered increasing support from legislators and voters in recent years. We provide initial evidence on its public finance effect. The staggered passage of state medical marijuana laws increases states’ borrowing costs by 7 to 11 basis points. States also experience greater deficits and incur higher marijuana-consumption-related expenditures following the law’s passage. These results are consistent with economic theory on substance use, which suggests that legalizing marijuana for medical purposes expands the availability, reduces the perceived risks, and increases the local consumption of marijuana. Further analyses support this theory and show that the increase in borrowing costs is stronger for states that are susceptible to a greater increase in marijuana consumption (i.e., those with poorer monitoring and enforcement, more vulnerable demographics, and better cultivation environments).

Keywords: Public Finance, Municipal Bond, Marijuana, Cannabis, Public Health Policy

JEL Classification: E60; G28; H74; H75; I18