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'Captive markets': the impact of kidnappings on corporate investment in Colombia

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  • Rony Pshisva
  • Gustavo A. Suarez

Abstract

This paper measures the impact of crime on firm investment by exploiting variation in kidnappings in Colombia from 1996 to 2002. Our central result is that firms invest less when kidnappings directly target firms. We also find that broader forms of crime--homicides, guerrilla attacks, and general kidnappings--have no significant effect on investment. This finding alleviates concerns that our main result may be driven by unobserved variables that explain both overall criminal activity and investment. Furthermore, kidnappings that target firms reduce not only the investment of firms that sell in local markets, but also the investment of firms that sell in foreign markets. Thus, an unobservable correlation between poor demand conditions and criminal activity is unlikely to explain the negative impact of firm-related kidnappings on investment. Our results are consistent with the hypothesis that managers are reluctant to invest when their freedom and life are at risk, although we cannot completely discard alternative explanations.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2006-18.

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Date of creation: 2006
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Handle: RePEc:fip:fedgfe:2006-18

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Keywords: Investments ; Crime ; Colombia;

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Citations

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Cited by:
  1. Mark Pingle & Alexander Fink, 2013. "Kidnap Insurance and its Impact on Kidnapping Outcomes," Working Papers 13-001, University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics.
  2. Abadie, Alberto & Gardeazabal, Javier, 2005. "Terrorism and the World Economy," DFAEII Working Papers 2005-19, University of the Basque Country - Department of Foundations of Economic Analysis II.
  3. Adriana Camacho & Catherine Rodriguez, 2013. "Firm Exit and Armed Conflict in Colombia," Journal of Conflict Resolution, Peace Science Society (International), vol. 57(1), pages 89-116, February.
  4. Cerro, Ana María & Rodríguez Andrés, Antonio, 2010. "The Effect of Crime on the Job Market: An ARDL approach to Argentina," MPRA Paper 44457, University Library of Munich, Germany.
  5. Adriana Camacho, 2007. "Stress and birth outcomes: evidence from terrorist attacks in Colombia," DOCUMENTOS CEDE 004014, UNIVERSIDAD DE LOS ANDES-CEDE.
  6. João Manoel Pinho de Mello & Eduardo Zilberman, 2006. "Does crime affect economic decisions? An empirical investigation of savings in a high-crime environment," Textos para discussão 524, Department of Economics PUC-Rio (Brazil), revised Oct 2008.
  7. Alexander Fink & Mark Pingle, 2012. "Kidnap Insurance and its Impact on Kidnapping Outcomes," ICER Working Papers 13-2012, ICER - International Centre for Economic Research.

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