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American Economic Journal: Economic Policy: Vol. 2 No. 4 (November 2010)

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Detecting Illegal Arms Trade

Article Citation

DellaVigna, Stefano, and Eliana La Ferrara. 2010. "Detecting Illegal Arms Trade." American Economic Journal: Economic Policy, 2(4): 26-57.

DOI: 10.1257/pol.2.4.26

Abstract

We propose a method to detect illegal arms trade based on investor knowledge. We focus on countries under arms embargo and identify events that suddenly increase or decrease conflict intensity. If a weapon-making company is trading illegally, an event that increases the demand for arms may increase stock prices. We find positive event returns for companies headquartered in countries with high corruption and low transparency in arms trade. We also suggest a method to detect potential embargo violations based on chains of reactions by individual stocks. The presumed violations positively correlate with the number of UN investigations and Internet stories. (JEL D74, F13, G14, K42, L64)

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Authors

DellaVigna, Stefano (University of California, Berkeley)
La Ferrara, Eliana (U Commerciale Luigi Bocconi and Innocenzo Gasparini Institute for Economic Research)

JEL Classifications

D74: Conflict; Conflict Resolution; Alliances
F13: Trade Policy; International Trade Organizations
G14: Information and Market Efficiency; Event Studies
K42: Illegal Behavior and the Enforcement of Law
L64: Other Machinery; Business Equipment; Armaments

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