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'Captive Markets': The Impact of Kidnappings on Corporate Investment in Colombia

63 Pages Posted: 21 Jun 2006  

Gustavo Suarez

Board of Governors of the Federal Reserve System

Rony Pshisva

Protego Investment Associates

Date Written: 2006

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 directly target firms. We also find that broader forms of crime - 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, although we cannot completely discard alternative explanations.

Keywords: Firm survival, employee turnover, human capital

JEL Classification: K42, 016, D74, P14, G30

Suggested Citation

Suarez, Gustavo and Pshisva, Rony, 'Captive Markets': The Impact of Kidnappings on Corporate Investment in Colombia (2006). FEDS Working Paper No. 2006-18. Available at SSRN: https://ssrn.com/abstract=910886 or http://dx.doi.org/10.2139/ssrn.910886

Gustavo Suarez (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Rony Pshisva

Protego Investment Associates ( email )

Sta. Catarina 267
Mexico DF 01060
Mexico

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