Up in Smoke: The Effect of Marijuana Legalization on Personal Bankruptcy

Abstract

Marijuana offers a low cost alternative to traditional medical treatment for a variety of health conditions. We use the legalization of medical marijuana in the U.S. to study the effect of a quasi-exogenous reduction in the cost of medical care on personal bankruptcy rates. We find that following legalization, bankruptcy rates decline by approximately 6 percent. Larger declines occur in populations facing higher out-of-pocket medical costs, such as those with high uninsurance rates or those residing in concentrated hospital markets, where medical costs are higher and quality is lower. Consistent with this medical cost channel, we find no effect of legalization on business bankruptcies, and no support for alternative explanations for the reduction in personal bankruptcies, such as an increase in economic activity, a decrease in marijuana-related arrests, or substitution away from other hard drugs following legalization.

Keywords: Medical Marijuana, Cannabis, Personal Bankruptcy, Healthcare Costs, Household Finance

JEL Classification: D14, I10, I13