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

Abstract

The staggered passage of state medical marijuana laws increases state bonds’ offering and trading spreads by 7-11 basis points. Consistent with medical marijuana laws causing an increase in states’ credit risk, states incur higher safety and public welfare expenditures and experience greater deficits following the law’s passage. Additional analyses show that the increase in spreads is stronger for states with greater corruption, more vulnerable demographics, and better cultivation environments. Overall, these results support 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.

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

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