Legalization and Innovation in the Cannabis Market

Abstract

How would legal institutions affect the rate and direction of innovation in restricted or illicit markets? This paper studies the impact of legalization on innovation in the cannabis market. We construct novel data on cannabis-related innovation in clinical trials and patent applications. Using staggered difference-in-differences models and event studies utilizing the variation in state legalization of medical and adult-use cannabis, we find no evidence that medical cannabis laws affect innovation. Adult-use cannabis laws increase trials and patenting, especially patenting in downstream products and methods rather than upstream chemical or treatment innovation. We corroborate the findings with multiple new methods in the literature. These results suggest that legalization increases innovation in the cannabis market, but with relatively weak gains in areas pertinent to health and safe use.

Keywords: cannabis legalization, innovation, clinical trials, patent applications, regulation

JEL Classification: I11, I19, O30, K20