The American Green Waves: Effects of Recreational Marijuana Legalization on Innovation Output, Firm Performance, and Human Capital

We employ a quasi-experimental study to investigate the impact of recreational marijuana legalization (RML) and increased marijuana use on firm performance. Leveraging the staggered implementation of RML across 14 U.S. states and Canadian provinces from 2007 to 2021, we use a robust difference-in-differences (DiD) event-study methodology. Despite an initial positive financial market response to RML in the short term, indicating cultural acceptance of marijuana use, our analysis reveals a subsequent reduction in overall firm performance in the long term. Drawing upon the Crepon-Duguet-Mairessec (CDM) theoretical framework, we provide evidence that RML influences firm performance solely through the innovative process channel, essentially by affecting human capital. Despite the increase in R&D investment correlating with an increase in firm innovative quantitative output, we observe a deterioration in innovation qualitative output, evidenced by declines in patent quality, originality, and technological impact. These results suggest a negative influence of RML on the innovation and production processes within firms, from ideation to realization. We further associate these findings with a significant 2.87% increase in marijuana prevalence among adults, which coincides with an immediate decline in individual cognitive function, as indicated by an increase in work-related and automobile accidents, lowering employee productivity and collaborative effectiveness.