A study published July 4 by Finance Research Letters found that recreational marijuana legalization is associated with a reduction in personal bankruptcy rates, with researchers pointing to lower marijuana arrest rates as a likely contributing factor.
Using state-level data from all 50 states and Washington, D.C., from 2001 to 2024, researchers from Shenzhen University examined whether the adoption of recreational marijuana laws affected personal bankruptcy filings. The study used an imputation-based staggered difference-in-differences design to compare states before and after legalization.
Researchers found that recreational marijuana legalization was associated with roughly 38 fewer personal bankruptcy filings per 100,000 residents each year, equal to an approximate 12% decline compared to the pre-legalization average of 314 filings per 100,000 residents.
The effect was stronger in economically stable states, including those with lower pre-legalization unemployment and bankruptcy rates and higher median household incomes.
Researchers said the findings are consistent with what they described as a “legal-cost channel.” According to the study, recreational legalization sharply reduced marijuana arrests, with states experiencing larger arrest declines also seeing larger reductions in bankruptcy filings.
“By reducing households’ exposure to criminal justice costs such as fines and legal fees, RML may ease the acute financial shocks that can tip vulnerable households into insolvency,” the study’s abstract states.
The study found that recreational marijuana legalization reduced marijuana arrests by roughly 87%, while not affecting broader crime rates. Researchers said this suggests the decline in bankruptcy rates may be tied specifically to reduced exposure to marijuana-related enforcement costs, including fines, attorney fees, court costs, lost wages and the long-term financial consequences of a criminal record.
The authors noted that personal bankruptcy is often triggered by medical expenses, job loss, income shocks and restricted access to credit. Because marijuana legalization can affect several of those areas in different ways, researchers said the overall impact on bankruptcy rates was not obvious before conducting the analysis.
“Using state-year panel data from 2001 to 2024, this paper presents evidence that recreational marijuana legalization is associated with a reduction in the personal bankruptcy rate in the United States,” the researchers concluded.
The authors said the study adds to a growing body of research examining the broader financial effects of marijuana legalization, including household credit, local economic activity and criminal justice exposure.
