Scarcity without Leviathan: The Violent Effects of Cocaine Supply Shortages in the Mexican Drug War∗ Juan Camilo Castillo† Daniel Mejía‡ Pascual Restrepo§ This version: April 2015 Abstract In this paper we show how scarcity increases violence in markets without third party enforcement. We construct a model in which supply shortages increase contested revenues and induce more violence. We test our model using the cocaine trade in Mexico. Scarcity created by cocaine seizures in Colombia – Mexico’s main supplier – increase violence in Mexico, especially in municipalities near the U.S. border, in municipalities with multiple cartels, and where crackdowns on the cocaine trade are more frequent. Our results indicate that the sharp decline in the cocaine supply from Colombian observed between 2006 and 2009 may account for 10%-14% of the increase in violence in Mexico in this period, and 25% of the differential increase in the North. Keywords: Rule of Law, War on Drugs, Violence, Illegal Markets, Mexico. JEL Classification Numbers: D74, K42. ∗We are grateful to Daron Acemoglu, Michael Clemens, Dora Costa, Leopoldo Fergusson, Bruno Ferman, Claudio Ferraz, Dorothy Kronick, and Otis Reid, as well as seminar participants at Universidad de los Andes, Stanford, UCLA, ITAM and the AL CAPONE and LACEA meetings for their very helpful comments and suggestions. Melissa Dell, Horacio Larreguy, and Viridiana Ríos kindly provided most of the data used in this paper. We gratefully acknowledge funding from the Open Society Foundation and from the Center for Global Development. †Economics Department, Universidad de los Andes, e-mail:
[email protected] ‡Corresponding author. Economics Department, Universidad de los Andes, e-mail:
[email protected] §Economics Department, MIT, e-mail:
[email protected] 1 Introduction According to Thomas Hobbes, in a world without the rule of law, where the state does not have a monopoly on violence and where no reliable third party can enforce laws and contracts, the life of man becomes “nasty, brutish and short”(Hobbes, 1651).