The Price Elasticity of Demand for Heroin

Matched Longitudinal and Experimental Evidence

Published in: Journal of Health Economics, v. 41, May 2015, p. 59-71

Posted on RAND.org on November 25, 2015

by Todd A. Olmstead, Sheila M. Alessi, Brendan Kline, Nancy M. Petri

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This paper reports estimates of the price elasticity of demand for heroin based on a newly constructed dataset. The dataset has two matched components concerning the same sample of regular heroin users: longitudinal information about real-world heroin demand (actual price and actual quantity at daily intervals for each heroin user in the sample) and experimental information about laboratory heroin demand (elicited by presenting the same heroin users with scenarios in a laboratory setting). Two empirical strategies are used to estimate the price elasticity of demand for heroin. The first strategy exploits the idiosyncratic variation in the price experienced by a heroin user over time that occurs in markets for illegal drugs. The second strategy exploits the experimentally induced variation in price experienced by a heroin user across experimental scenarios. Both empirical strategies result in the estimate that the conditional price elasticity of demand for heroin is approximately -0.80.

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