Detecting Illegal Arms Trading

I always love it when I see a paper that only an economist could write. An ingenious new study by Stefano DellaVigna and Eliana La Ferrara definitely fits that description.

The issue they tackled is detection of illegal arms trades that defy United Nations embargoes. Their idea was to use the information embedded in stock markets to tease out indirect evidence of the illegal deals. Legitimate weapons dealers that obey the embargoes are hurt by them, while illicit dealers benefit. So DellaVigna and La Ferrara examined how the stock prices of weapons dealers in different countries are affected by events that raised and lowered the likelihood that the embargo will be rescinded. They found that the stock prices of arms sellers in countries more likely to house illicit dealers (e.g. countries with more corruption and less rule of law) rise when events prolong embargoes, whereas stocks of arms dealers in countries like the U.S. fall in response to the same news.

While this is not the sort of evidence you could use to convict somebody, it is an excellent example of what some are calling the “forensic economics” movement. In a column in last week’s Philadelphia Inquirer, the conservative talk-radio host Michael Smerconish called for forensic economists (myself in particular) to apply our tools to terrorism. More to come, perhaps.

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  1. Blue Sun says:

    “Forensic Economics…”

    Before I read a paper by an economist, any economist, I remind myself of what an economist I used to work with was fond of saying:

    “An economist is somebody who can explain tomorrow why what he predicted yesterday did not happen today.”

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  2. Blue Sun says:

    “Forensic Economics…”

    Before I read a paper by an economist, any economist, I remind myself of what an economist I used to work with was fond of saying:

    “An economist is somebody who can explain tomorrow why what he predicted yesterday did not happen today.”

    Thumb up 0 Thumb down 0
  3. jonathan says:

    It would be more interesting if they didn’t find what everyone already believed but instead found a counter-intuitive relation. You don’t need sophisticated analysis to believe and know their conclusion. It would also be more interesting if they could somehow measure the effect – as in anticipated revenues, reported earnings – of displacement of sales from high legal to low legal countries. That would give an indication of the degree of effectiveness of an embargo and the degree to which arms sales would merely be moved to less lawful locales.

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  4. jonathan says:

    It would be more interesting if they didn’t find what everyone already believed but instead found a counter-intuitive relation. You don’t need sophisticated analysis to believe and know their conclusion. It would also be more interesting if they could somehow measure the effect – as in anticipated revenues, reported earnings – of displacement of sales from high legal to low legal countries. That would give an indication of the degree of effectiveness of an embargo and the degree to which arms sales would merely be moved to less lawful locales.

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  5. George from Oregon says:

    Jeeez Another “Conservative Talk Radio Host”! They sprout like mushrooms living in a environment of their own making.

    I think you would do well to check out their financial statements not their stock prices. Stocks move for many reasons. What we need is forensic accounting, not economics. It seems like it would be easy, in just looking at the stock price, to draw false corelations. Just because something seems to “make sense” does not mean that it is anything more than just coincidence.

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  6. George from Oregon says:

    Jeeez Another “Conservative Talk Radio Host”! They sprout like mushrooms living in a environment of their own making.

    I think you would do well to check out their financial statements not their stock prices. Stocks move for many reasons. What we need is forensic accounting, not economics. It seems like it would be easy, in just looking at the stock price, to draw false corelations. Just because something seems to “make sense” does not mean that it is anything more than just coincidence.

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  7. Chris Jacques says:

    It seems that some people either haven’t read Freakonomics, or missed the point of this blog post.

    Dr. Levitt doesn’t use economics to predict things with precision. Instead, it seems to me that his approach is to explain, or at least explore, events and trends in the past. From these novel observations, one may be able to draw novel conclusions. Of course it’s always possible to draw lessons from the past and apply them to the present, but a good economic thinker would realize that all situations are different, all information is incomplete, and that the past can only be used as the most general of guidelines.

    http://thehmologist.blogspot.com

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  8. Chris Jacques says:

    It seems that some people either haven’t read Freakonomics, or missed the point of this blog post.

    Dr. Levitt doesn’t use economics to predict things with precision. Instead, it seems to me that his approach is to explain, or at least explore, events and trends in the past. From these novel observations, one may be able to draw novel conclusions. Of course it’s always possible to draw lessons from the past and apply them to the present, but a good economic thinker would realize that all situations are different, all information is incomplete, and that the past can only be used as the most general of guidelines.

    http://thehmologist.blogspot.com

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