Evidence of a causal effect of inequality on crime is scarce in developing countries. This paper estimates the effect in a unique context: Mexico's Drug War. The analysis exploits a unique dataset containing inequality and crime statistics for more than 2,000 Mexican municipalities over a 20-year period. An instrumental variable for the Gini coefficient combines the initial income distribution at the municipality level with national trends. The results indicate that a one-point increment in the Gini between 2006-2010 translates into an increase of over 10 drug-related homicides per 100,000 inhabitants. These effects are smaller between 1990 and 2005. The fact that the effect found during the Drug War is substantially higher is likely because the cost of crime decreased with the proliferation of gangs (lowering the marginal cost of criminal behavior), which, combined with rising inequality in some municipalities, increased the expected net benefit of criminal acts after 2005.Keywords: Income Inequality; Crime; Instrumental Variables; Mexico JEL classification: C26, D74, H70, I3, O54 1 Princeton University. E-mail: tede@princeton.edu 2 World Bank. E-mail: lflopezcalva@worldbank.org (corresponding author). 3 World Bank. E-mail: crodriguezc@worldbank.org 4 World Bank. E-mail: hwinkler@worldbank.org The authors would like to thank Alan Fuchs, Samuel Freije-Rodríguez and participants of the third Summer Initiative for Research on Poverty, Inequality and Gender of the World Bank for their thoughtful comments, and Eduardo Ortiz-Juarez and Daniel Valderrama for invaluable research assistance. The findings, interpretations and conclusions in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank Group, its Executive Directors, or the countries they represent.
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IntroductionThe question of what is the effect of inequality on crime has been a matter of interest among many researchers and policy analysts. While most of the literature on this topic finds a positive effect of inequality on crime, the empirical evidence has fallen short in establishing an unambiguous direction of causality (see Pridermore, 2011), as well as on whether the effect holds for different types of violent crime. Moreover, when focusing on developing countries the available evidence is weaker given that reliable and comparable crime statistics tend to be scarce. In addition, scholars have faced other major challenges when delving into this subject. For example, cross-country studies are usually biased by measurement error and omitted variables problems, and they are also limited by smallsample sizes. Reverse causality is a matter of concern, since increasing crime rates might also affect inequality by, for example, encouraging richer residents to move out of violent locations.Neumayer (2005) points out that focusing on within-country variation could be a remedy to the difficulty to control for confounding factors at the country level and to the small-sample problem that arises in cross-c...