These essays contribute towards our understanding of the consequences of illegal behavior on economic outcomes and of the role of public policy in addressing and containing those consequences more effectively. This dissertation is composed of three chapters.
Chapter 1 -- Is murder bad for business and real income? The effects of violent crime on local economic activity: studies the channels through which violence (measured by the homicide rate) 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 higher homicide rates lower housing rents and increase prices. Wages also increase, but only for white-collar workers. Putting all these forces together, real wages fall for both types of worker, but more so for blue-collar workers. These estimates, in combination with a theoretical model, allow me to compute that when homicide rates increase 10%, white- and blue-collar workers' welfare (measured as utility of consumption) 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. Chapter 2-- On the consequences of enforcement on illegal drug production: investigates the effects of the biggest antidrug program ever applied in a drug producing country. I use satellite information on the exact location of coca crops between 2000 and 2010 in Colombia to identify the effects of spraying herbicides on coca production. I exploit the variation created by restrictions to spraying in protected areas (i.e., indigenous territories and natural parks) and the time variation of U.S. international antidrug expenditures to identify the effects of the program. My results suggest that coca cultivation is reduced by 0.07 hectares per additional hectare sprayed. However, spraying induces unintended negative effects on the welfare conditions of the treated areas and spillover effects in neighboring countries. Despite the reduction under coca cultivation, cocaine production remains steady due to a sharp increase on cocaine yields. In sum, the program's costs are by far higher than its potential benefits.
Chapter 3 -- On the effects of enforcement on illegal markets: evidence from a quasi-experiment: studies the effects of enforcement on illegal behavior in the context of a large aerial spraying program designed to curb coca cultivation in Colombia. In 2006, Colombia pledged not to spray a 10km band around the frontier with Ecuador due to diplomatic frictions. We exploit this variation to estimate the effect of spraying on cultivation by regression discontinuity around the 10 km threshold and conditional differences in differences, using satellite data. Our results suggest that spraying one hectare reduces coca cultivation by 0.018 to 0.034 hectares, but these effects are too small to make spraying a cost-effective policy.
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