Is Murder Bad for Business and Real Income? The Effects of Violent Crime on Economic Activity

Sandra V. Rozo, University of California, Los Angeles

High levels of violence are associated with lower income and higher inequality. This paper studies the channels through which violence impacts economic outcomes, and thus whether investments in violence reduction have significant economic returns. I estimate the effects of violent crime on local wages, prices, and production using unique firm-level panel data and rich information on consumer prices in Colombia. To estimate causal effects, I exploit exogenous reductions in violent crime driven by U.S. international anti-drug expenditures; these resulted in greater violence reductions in municipalities with higher political competition (namely closely contested elections) in the past. I find that when homicide rates increase 10%, white- and blue-collar workers' welfare is reduced 2.8% and 6.3%, respectively. Consequently, violent crime increases inequality as measured by real incomes or by welfare. Aggregate production also falls 2.1%, mostly because firms reduce production, although there is also a small decrease in the number of firms.