An experiment about drugs legalization and the investor behavior
The illegal drugs market is one of the main issues in the political agenda in Colombia. Literature has focused on legalization in consumption (demand) but studies about legalization of production (supply) are scarce. Taking into account that Colombia is a country leading in drugs production but not drugs consumption in the world, it is relevant to understand illegal drugs supply. The elements that influence decisions about drugs production and the investor behavior under certain incentives have received few attention. In order to analyze the behavioral structure of investment decisions, this paper conducts a laboratory experiment. The aim is to analyze the effect of three different factors influencing the individual decision to invest when a business is related to (i) a criminal activity (illegal), (ii) drugs, or (iii) a negative social effect (negative externality) using a between subjects design. The experiment has two parts. Part I is a replication of the “Ten Paired Lottery-Choice Decisions” by Holt and Laury (2002) to measure individual's risk aversion level. Part II keeps the same structure but shows a frame that varies three elements along treatments: type of business (drugs-related or neutral), legal status (illegal or legal) and the presence of a negative externality. The experiment was applied on 141 undergraduate students of the Universidad del Rosario. Results show a robust gender effect meaning that women are more risk averse than men and they are more prone to increase their risk aversion level in Part II while they revealed more conservative attitudes in front of drugs policies in the post experiment survey. No evidence was found of any effects of illegality and the negative externality on investment decisions. Descriptive comparisons suggest an unwillingness to invest in a drugs-related business. These results suggest that neither illegality nor the existence of a negative externality are efficient elements to discourage investment.
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- Maestría en Economía