The Relative Effectiveness of Law Enforcement Policies Aimed at Reducing Illegal Trade: Evidence from Laboratory Markets

Despite recent emphasis and implementation of national and international anti-money laundering policies, illegal product markets, and their associated illicit profit remain a global problem. In addition to law enforcement aimed at reducing money-laundering, enforcement also takes place during (1) the production (e.g. crop eradication) and (2) sale (e.g. seizure of products during transportation that interrupts buyer and seller transactions) of the illegal product. Since funds for enforcement come from limited budgets, understanding where in this production-trade-laundering cycle law enforcement is most impactful becomes a global question. Using laboratory experimental markets and a seizure rate of 20%, we find that law enforcement focused on seizing laundered profits does little to reduce illegal market activity when compared to no law enforcement, suggesting that focusing law enforcement on money laundering will likely be ineffective at reducing crime. Results further show the amount of illicit trade is nearly 32% lower when law enforcement is focused at the point of sale, and there may be additional economic incentives that reduce illicit trade in the long run when compared to no law enforcement. Enforcement at the point of production also reduces market activity, but not as effectively as enforcement at the point of sale. Lastly, the empirical findings deviate from equilibrium predictions, suggesting law enforcement policy based on theory alone may lead to inefficient allocation of limited law enforcement resources.