Examining the impact of pacification on informal entrepreneurs in Brazilian favelas

Drawing on formal and informal institutional voids and disadvantage theory, we ask whether exogeneous reduction in crime improves the outcomes of informal self-employment. Using fixed-effects individual slopes (FEIS) by individual and by the policing unit, self-employed in favelas had a lower yearly income (139.27 BRL a year [~28 USD], or 4.66% below average annual income) than those living immediately outside of favelas, however, income improvements were not realized by those living favelas. With a monthly income of 11 USD for poor in Brazil, the annual USD 28 difference translates to about 2.5 months of income loss. The findings do not vary by demographics and do not indicate meaningful impact on living standard. To assess longer term aggregate effects, using night-time lights at the zip code level, a higher percentage of self-employed in a zip code lower aggregate income but do not improve wealth index. The findings show that institutional effects of poverty in favelas are deeply rooted and difficult to overcome with crime reduction.