This paper explores the unintended liberalization of light cannabis that occurred in Italy in December 2016 by means of a legislative gap in order to assess its effect on the illegal supply of marijuana. Although liberalization interested the entire Italian territory, in the short run, the level of intensity varied according to the pre-liberalization market configuration of grow shops, i.e., retailers that sold industrial cannabis-related products. We exploit this variation using a differences-in-differences (DID) design with a unique dataset on monthly confiscations of drugs at the province level during 2016–2018, which is matched with data on the geographical location of shops and socio-demographic variables. We find that the liberalization of light cannabis led to a reduction of up to 14% in marijuana confiscations per each pre-existing grow shop and a significant decrease in both other cannabisderived drugs and in the number of people arrested for drug-related offences. Back-of-theenvelope calculations suggest that forgone revenue for criminal organizations amount to at least 90–170 million euros per year. These results support the argument that the supply of illegal drugs is displaced by the entry of official and legal retailers.

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European Economic Review
Department of Applied Economics