The Empirical Issue of Smuggling: A Discussion of Methodology

The theoretical results attained from the literature on Illegal Transactions in International Trade suggest: 1) a positive link between the duty levied and the level of smuggling effort; 2) a nonnegative domestic relative price effect; and 3) an ambiguous social welfare effect. The theoretical results predict the generation of some type of distortion. The literature labels these distortions disparities and divides them into three categories: price, value, and quantity. These distortions represent the empirically measurable effects of smuggling on the domestic economy. This paper makes the proposition that the price disparity distortion is the variable that empirical studies should examine to determine whether smuggling has an impact on the economy. A suggested empirical procedure is presented. The statistical procedure employs a classical hypothesis test to determine if there is statistical evidence supporting the predictions made in the theoretical literature