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

Abstract

Marijuana liberalization has generated heated debates over its potential benefits and costs. However, limited attention has been given to its capital market implications. We provide the first evidence on one cost of liberalizing cannabis imposed by municipal bond investors. Making use of the staggered passage of state legislation, we show that legalization of marijuana for medical use leads to a 7-bps increase in the offering spread, an 11-bps increase in the trading spread, and a 4-bps increase in the gross spread for state bonds. To strengthen the causal inference, we employ two additional identification strategies — a test that compares the borrowing costs of adjacent counties across state borders and a test that compares the borrowing cost of two states in which one state passed and the other rejected marijuana laws with narrow margins in ballots. The evidence collectively suggests that municipal bond investors impose higher borrowing costs on local governments in states that have legalized medical marijuana.

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

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