How Much Happiness is Caused by Lower Violence? Measuring Local Market Effects of Homicide Rates

PWP-CCPR-2014-007

Abstract

This paper estimates the effects of violence on worker's and rm's welfare. My analysis proceeds in three steps. First, I estimate empirically the elasticity of violence on non-housing good prices, wages, and firm's profits, to then, combine them with a theoretical model, and quantify the welfare effects. This allows disentangling the effects of violence into its direct disutility effects and its indirect effects through changes in market prices. I use unique panel data at the firm level for Colombia throughout 1995 and 2010, when the country faced a 48% reduction on homicide rates, from 65.8 to 33.9, respectively. Using these data I exploit the geographical and annual variation of homicide rates to identify the effects of violence. I instrument violence with the interaction of U.S. international antidrug expenditures - which contributed to improve security conditions in Colombia - and a political competition index for 1946. The political competition index measures the intensity of a past violent episode known as La Violencia which historians point as the origin of the current violence spell in Colombia. I find that when homicide rates increase by 1% worker's welfare falls by 0.46%, and firm's profits decrease by 0.18%. Moreover, 96% of the effects of violence on worker's welfare are explained by changes on market prices, mainly driven by changes on non-housing living costs. My estimates suggest that the 48% drop in homicide rates that occurred in Colombia between 1995 and 2010 increased firm's prots by 8.64%, and blue and white-collars worker's welfare by 13.74% and 30.35%, respectively.