Legalization and innovation in the cannabis market

How would legal institutions affect the rate and direction of innovation in restricted or illicit markets? This paper studies the impact of legalization on innovation in the cannabis market. We construct novel data and measures on cannabis-related innovation in clinical trials and patent applications at the state-year level. We use staggered difference-in-differences models and event studies to analyze the impacts of medical and recreational cannabis legalization (MCL and RCL, respectively) on innovation. We find no evidence that cannabis-related clinical trials respond to MCLs or RCLs. However, there is a marked increase in cannabis-related patenting ( ∼ 4.4 patents) in response to an RCL and more modest impacts from an MCL ( ∼ 1.4 patents). Notably, additional RCL-induced patents are focused primarily on downstream products and methods rather than upstream medical innovation; MCL impacts show a similar pattern. Our further analysis of patent content suggests significant growth in areas that may raise public health, safety, and misuse concerns. These results suggest that legalization increases innovation in the cannabis market, but with relatively weak gains in areas pertinent to health and safe use. We corroborate our findings with multiple new empirical methods in the literature.