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Market Structure and Extortion: Evidence from 50,000 Extortion Payments

Author

Listed:
  • Zach Y. Brown
  • Eduardo Montero
  • Carlos Schmidt-Padilla
  • Maria Micaela Sviatschi

Abstract

How does gang competition affect extortion? Using detailed data on individual extortion payments to gangs and sales from a leading wholesale distributor of consumer goods and pharmaceuticals in El Salvador, we document evidence on the determinants of extortion payments and the effects of extortion on firms and consumers. We exploit a 2016 nonaggression pact between gangs to examine how collusion affects extortion in areas where gangs previously competed. While the pact led to a large reduction in competition and violence, we find that it increased the amount paid in extortion by approximately 20%. Much of this increase was passed through to retailers and consumers: retailers experienced an increase in delivery fees, leading to an increase in consumer prices. In particular, we find an increase in prices for pharmaceutical drugs and a corresponding increase in hospital visits for chronic illnesses. The results point to an unintended consequence of policies that reduce competition between criminal organizations.

Suggested Citation

  • Zach Y. Brown & Eduardo Montero & Carlos Schmidt-Padilla & Maria Micaela Sviatschi, 2020. "Market Structure and Extortion: Evidence from 50,000 Extortion Payments," NBER Working Papers 28299, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28299
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    More about this item

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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