PROJECT

THE EFFECTS OF VIOLENCE ON COMMERCIAL LOANS: EVIDENCE FROM MEXICO'S NARCO-WARS

Researcher: Lorenzo Lagos, PhD Student in Economics

Empirical studies have shown that crime and economic growth are negatively correlated. However, little is known about the mechanisms through which crime affects growth.  In the case of Latin America—and Mexico in particular—drug-related violence is an increasingly prevalent manifestation of crime. This research project focuses on one potentially crucial link between such violence and growth: commercial credit markets. On one hand, credit markets are presumably responsive to violence since banks rely on risk assessments for lending decisions, and the degree of drug-related violence is likely to impact perceptions of risk. On the other hand, there is ample evidence in the development literature that providing cash and in-kind grants to firms generates large returns, especially among those that are credit constrained. Since asymmetric information regarding the risk of a loan contributes to credit constraints, the effect that violence has on risk perceptions could exacerbate this barrier to development. The aim of this project is to estimate the causal effect that drug-related violence has on business loans in Mexico. The proposed identification strategy exploits variation in homicides within municipalities from 2010 to 2016.