The price of Crime: How Crime Affects Private Investment in South America

Abstract

This paper analyzes the impact of crime on private investment in eleven South American countries. We adapt a model proposed by Acevedo and Mora (2008) to include crime, understood as the insecurity due to violence and criminal and illegal actions. We find that crime affects private investment in two levels. First, an increase in the expected cost resulting from crime diminishes private investment. Second, the variance of crime decreases the amount of investment. Using data from the Penn World Tables and the oas Hemispheric Security Observatory, we build a panel data set for the South American countries from 2000 to 2010 and quantify our model using a unique index of crime that accounts for average and variation effects within each country. After accounting for time invariant unobservable heterogeneity and using a fixed effect panel data approach, we find that crime has a negative effect on increases in private investment. These results are consistent after several robustness checks.