The Economic Burden of Crime

Impact of Violent Crime on Risk Aversion: Evidence from the Mexican Drug War

“…Specifically, if the areas most economically impacted by the Great Recession also happened to be the locations with the largest change in violence this would violate our identification strategy. Several studies of this issue, though, have confirmed that the geographic heterogeneity of crime in Mexico does not correspond to the differential regional magnitude of the Great Recession (Ajzenman et al, 2015;Velásquez, 2015). Despite the lack of evidence to corroborate this potential issue, we next conduct robustness checks on our main result from column 6 of Table 3, to help alleviate concerns that the Great Recession biases our findings.…”

“…street vendors, small business owners, domestic services, etc.) (Velásquez, 2015). The economic literature suggests that risk aversion is negatively associated with income and wealth (Barsky et al, 1997;Guiso and Paiella, 2008) and thus through this channel we would expect that exposure to violence would increase levels of risk aversion.…”

“…This analysis should be viewed with caution as these economic controls are potentially endogenous in a way that would bias our estimates towards zero, as previous research has documented the negative economic impact of the War on Drugs in Mexico (Robles et al, 2013;Dell, 2015;and Velásquez, 2015) and this could be part of the causal channel that influences the risk attitudes of individuals exposed to local violence. 17 Specifically, respondents from the Mexican northern border states in the MxFLS (i.e.…”

“…Another potential pathway is financial. Studies on the impact of the Mexican drug war have found that individuals with greater exposure to violence have suffered poorer economic outcomes (Dell, 2015;Robles et al, 2013;and Velásquez, 2015). Relying on different identification strategies, these studies find that the surge in crime has had a detrimental effect on the labor market participation and income of the Mexican population.…”

“…Second, the increase in potential victimization is likely to provoke heightened anxiety and fear, which has been shown to induce increased risk averse decision-making (Lerner and Keltner, 2001;Raghunathan and Pham, 1999). Third, given the evidence that risk aversion is negatively associated with income and wealth (Barsky et al, 1997;Guiso and Paiella, 2008), another potential link between crime and risk preferences is through the negative effect that the Mexican drug war has had on the economic outcomes of the affected population (Dell, 2015;Robles et al, 2013, Velásquez, 2015.…”