Working Papers in Economics,
University of Bergen, Department of Economics

Abstract: An important question for policy makers is how drug users may respond to changes in economic factors. Based on a unique data set of almost 2,500 interviews with people attending a needle exchange service in Oslo, this paper aims at estimating the impact of economic factors on heroin and amphetamine injectors' drug consumption. Four econometric models versions are considered. The results include, in addition to estimates of price and income elasticities within switching regression models treating dealing/non-dealing as an endogenous decision, estimates of cross-price elasticities of the two drugs, and an examination of possible `kinks' in the demand curve of heroin. One dynamic model version speci cally aims at examining the issue of addiction. Lastly, we examine, by means of pseudo panel data models, the possible influence of various kinds of unobserved heterogeneity on estimated price and income responses. In many of the models, we obtain negative and signi cant price elasticities and positive and signi cant income elasticities, although the size of the estimates vary, depending on the model applied, on the main drug for injecting, and on whether the consumer also is a dealer.

Keywords: heroin; amphetamine; price response; drug dealing; cross-price elasticity.

JEL-codes: C21; C22; C23; D12

41 pages, April 14, 2002

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