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Captive Markets: The Impact Of Kidnappings On Corporate Investment In Colombia

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  • Rony Pshisva
  • Gsutavo 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.

Suggested Citation

  • Rony Pshisva & Gsutavo Suarez, 2005. "Captive Markets: The Impact Of Kidnappings On Corporate Investment In Colombia," Documentos CEDE 3786, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:003786
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    More about this item

    Keywords

    Crime; Kidnappings; Investment; Colombia;
    All these keywords.

    JEL classification:

    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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