The Impact of Kidnappings on Corporate Investment in Colombia Cede
View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics DOCUMENTO CEDE 2005-56 ISSN 1657-7191 (Edición Electrónica) SEPTIEMBRE DE 2005 CEDE “CAPTIVE MARKETS”: THE IMPACT OF KIDNAPPINGS ON CORPORATE INVESTMENT IN COLOMBIA RONY PSHISVA * GUSTAVO A. SUAREZ Abstract This paper measures the impact of crime on firm investment by exploiting variation in kidnappings in Colombia from 1996 to 2002. Our central result is that firms invest less when kidnappings target firms. We also find that aggregate crime rates—homicides, guerrilla attacks, and general kidnappings—have no significant effect on investment. This finding alleviates concerns that our main result may be driven by unobserved variables that explain both overall criminal activity and investment. Furthermore, kidnappings that target firms reduce not only the investment of firms that sell in local markets, but also the investment of firms that sell in foreign markets. Thus, an unobservable correlation between poor demand conditions and criminal activity is unlikely to explain the negative impact of firm-related kidnappings on investment. Our results are consistent with the hypothesis that managers are reluctant to invest when their freedom and life are at risk; however, we cannot completely discard alternative explanations. Keywords: Crime, Kidnappings, Investment, Colombia. JEL classification: K42, O16, D74, P14, G30. * Pshisva is at Protego, Mexico and Suarez is at the Board of Governors of the Federal Reserve. For their valuable advice and continuous encouragement, we are grateful to our advisors at Harvard: Marty Feldstein, Larry Katz, Andrei Shleifer, and Jeremy Stein. For useful comments, we are indebted to Alberto Abadie, Philippe Aghion, Pedro Aspe, Antonio Cabrales, Rafael Di Tella, Juan Carlos Echeverry, Carola Frydman, Arturo Galindo, Alejandro Gaviria, Ed Glaeser, Borja Larrain, Rodolfo Martell, Adriana Lleras-Muney, Marcelo Moreira, Emily Oster, Jorge A.
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