Crime and violence effects on economic diversity


This paper exploits a substantial increase in homicides created by a war between
drug trafficking organizations in Mexico to estimate the causal effects of crime and
violence in the diversity of local economies. Relying on a dataset of homicides
caused by organized criminal rivalry, a text-analysis algorithm that allowed us to
track activities of Mexico’s drug trafficking cartels, and an exceptionally detailed
economic census, I developed a panel fixed-effect model, and a model that controls
for the possible endogeneity using instrumental variables. Results show
that subnational economies afflicted with large increases in crime and violence ex
perience reductions in the diversity of its production structure and increases their
degree of production concentration. Specifically, an increase of 10% in homicides
rates reduces the number of sectors that exists in an economy by 0.006 units. A
similar increase in the number of criminal organizations has a reduction effect of
0.032 units. Our results are robust by several specifications and various controls to
account for the potential endogeneity of violence.

Last updated on 08/28/2019