Market Structure and Extortion: Evidence from 50,000 Extortion Payments

67 Pages Posted: 4 Jan 2021 Last revised: 12 May 2023

See all articles by Zach Brown

Zach Brown

University of Michigan

Eduardo Montero

University of Michigan at Ann Arbor

Carlos Schmidt-Padilla

University of California, Berkeley

Maria Micaela Sviatschi

Princeton University

Date Written: December 2020

Abstract

How does gang competition affect extortion? Using detailed data on individual extortion payments to gangs and sales from a leading wholesale distributor of consumer goods and pharmaceuticals in El Salvador, we document evidence on the determinants of extortion payments and the effects of extortion on firms and consumers. We exploit a 2016 nonaggression pact between gangs to examine how collusion affects extortion in areas where gangs previously competed. While the pact led to a large reduction in competition and violence, we find that it increased the amount paid in extortion by approximately 20%. Much of this increase was passed through to retailers and consumers: retailers experienced an increase in delivery fees, leading to an increase in consumer prices. In particular, we find an increase in prices for pharmaceutical drugs and a corresponding increase in hospital visits for chronic illnesses. The results point to an unintended consequence of policies that reduce competition between criminal organizations.

Suggested Citation

Brown, Zach and Montero, Eduardo and Schmidt-Padilla, Carlos and Sviatschi, Maria Micaela, Market Structure and Extortion: Evidence from 50,000 Extortion Payments (December 2020). NBER Working Paper No. w28299, Available at SSRN: https://ssrn.com/abstract=3759837

Zach Brown (Contact Author)

University of Michigan ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Eduardo Montero

University of Michigan at Ann Arbor ( email )

Carlos Schmidt-Padilla

University of California, Berkeley

210 Barrows Hall
Berkeley, CA 94720
United States

Maria Micaela Sviatschi

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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