Liquidity Shocks and Drug Sales: Evidence From India

ABSTRACT

How do liquidity shocks affect drug sales? Building on prior work on search costs in pharmaceutical markets, we propose that liquidity constraints have a larger impact on drug sales for less recurring acute ailments than chronic ailments, which have steady consumption. We exploit demonetization in India in 2016 as a transitory negative liquidity shock. Units, value, and weight of acute drug sales experienced a relatively higher decline than those for chronic illnesses. Consistent with the search cost hypothesis, we find that the impact varies by close correlates of search, such as drug price dispersion, government‐mandated stock‐keeping, and availability of public health infrastructure. Our work contributes by showing how the constrained liquidity of households can have differential effects on the downstream market structure of retail drugs.