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dealers in different countries are affected by events that raised and lowered the likelihood that the embargo will be rescinded.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. Max Power says:

    Not only has market data been applied to detect illegal arms trades, as in this case, but stock market data has certainly been used to evaluate counterterrorism policy. A paper by Asaf Zussman and Noam Zussman in the JEP use stock market data to determine the effectiveness of assassinations as a counterterrorism policy in Israel. It certainly is an interesting approach.

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  2. Max Power says:

    Not only has market data been applied to detect illegal arms trades, as in this case, but stock market data has certainly been used to evaluate counterterrorism policy. A paper by Asaf Zussman and Noam Zussman in the JEP use stock market data to determine the effectiveness of assassinations as a counterterrorism policy in Israel. It certainly is an interesting approach.

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  3. Rita: Lovely Meter Maid says:

    Admittedly, this topic was a (tad, wee, tiny, bit) more (dare I say it)? boring for me, than others, so I guess I (ahem) *jumped the gun* and gladly took to the idea that Levitt was being enjoyably ironic again. Or, maybe I had hoped he was, since I actually didn’t read much beyond “I always love it when I see a paper…” Now I see he was sincere. Deeply sincere and indeed, Decidely sincere. Yes, and so, now I am too. Sincere, that is. I’m Older. And Wiser. Yup, and Much More prone to reflect now, rather than just *fire off* a response. At least for today, anyhow…

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  4. Rita: Lovely Meter Maid says:

    Admittedly, this topic was a (tad, wee, tiny, bit) more (dare I say it)? boring for me, than others, so I guess I (ahem) *jumped the gun* and gladly took to the idea that Levitt was being enjoyably ironic again. Or, maybe I had hoped he was, since I actually didn’t read much beyond “I always love it when I see a paper…” Now I see he was sincere. Deeply sincere and indeed, Decidely sincere. Yes, and so, now I am too. Sincere, that is. I’m Older. And Wiser. Yup, and Much More prone to reflect now, rather than just *fire off* a response. At least for today, anyhow…

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  5. Ken Hanson says:

    Ease up on Rita. Anyone that can work imbroglio into a post needs to be met with aplomb.

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  6. Ken Hanson says:

    Ease up on Rita. Anyone that can work imbroglio into a post needs to be met with aplomb.

    Thumb up 0 Thumb down 0
  7. Enough Wealth says:

    Just goes to show that economists, unlike freakonomists, just draw the obvious conclusions. Of course, “…stock prices of arms sellers in countries more likely to house illicit dealers … rise when events prolong embargoes, whereas stocks of arms dealers in countries like the U.S. fall in response to the same news.”. That’s exactly what drives stock prices – people buying stocks that they *think* will benefit from news and selling those that they *think* will suffer from the same news. Unless there is a LOT more insider trading going on than most people think, this doesn’t mean that stock prices actually indicate which companies WILL benefit/suffer from the news. The only way for such stock analysis to correctly identify companies that trade in illegal arms would be to see what stocks were being bought or sold by “knowledgeable insiders” ie. those that buy illegal arms and therefore know which companies actually will benefit from the news.

    Regards
    http://enoughwealth.com

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  8. Enough Wealth says:

    Just goes to show that economists, unlike freakonomists, just draw the obvious conclusions. Of course, “…stock prices of arms sellers in countries more likely to house illicit dealers … rise when events prolong embargoes, whereas stocks of arms dealers in countries like the U.S. fall in response to the same news.”. That’s exactly what drives stock prices – people buying stocks that they *think* will benefit from news and selling those that they *think* will suffer from the same news. Unless there is a LOT more insider trading going on than most people think, this doesn’t mean that stock prices actually indicate which companies WILL benefit/suffer from the news. The only way for such stock analysis to correctly identify companies that trade in illegal arms would be to see what stocks were being bought or sold by “knowledgeable insiders” ie. those that buy illegal arms and therefore know which companies actually will benefit from the news.

    Regards
    http://enoughwealth.com

    Thumb up 0 Thumb down 0