How does imperfect law enforcement affect drug trafficking, predation on firms, informality (tax avoidance), and aggregate output? Using differences at the state level on the implementation of the Mexican War on Drugs, I first provide causal evidence that the escalation of organized crime reduced output by 4% in the state of Chihuahua. Next, to understand the mechanisms and the policy implications, I develop a general equilibrium model of occupational choice in which imperfect institutions induce drug trafficking, crime against businesses, and tax avoidance. I use a detailed micro-level dataset on business victimization and data on drug cartels to calibrate my model. I find that imperfect laws result in sizable losses of national output attributed to the misallocation of resources and occupations. In counterfactual simulations, I consider the effects of policies that intend to improve the allocation of resources in the private sector. By shutting down the illegal drug market, labor reallocates to the productive sector, and aggregate output increases by 0.5%. Without crime against businesses, output increases by 2.6%, and without informality, output increases by 11.9%. The last two effects arise through a reallocation of labor, capital, and occupations to the more-productive formal sector.
A whiter shade of wealth: Skin color discrimination and the distribution of wealth
Fields of interest: Macroeconomics, Development and Econometrics.
What are the effects of skin-color discrimination on the distribution of wealth? Using data from the Latin American Public Opinion Project I provide reduced form evidence that wealth has a skin color gradient in Latin America: people with the lightest skin accumulate 9% more assets than people with the darkest skin. I explore the determinants of those differences and find skin-color gaps in wages, education, and health. Those with the darkest skin earn half as much as whites, have one year less of education and report worse health outcomes. I build an overlapping generations model in which individuals with different skills make human capital decisions based on their future wage. A skin-color related wedge between the market wage and the marginal product of labor inhibits human capital accumulation. The combined effects of lower wages and lower human capital create a wealth gradient by skin color.
Changing Worldviews and Macroeconomic Dynamics
Joint with Josef Hollmayr, Diego Legal and Christian Matthes
How often do households, firms, market participants, and policymakers change their view of the world? How do these changes affect economic outcomes? We tackle these questions by first operationalizing a 'worldview' as a specific economic model that agents use to form forecasts of any variable of interest. When agents update their worldview, they do so just like agents in the literature on learning in macroeconomics (Marcet & Sargent, Evans & Honkapohja, Primiceri, to name just a few key contributors). The novelty of our approach is that we explicitly model when agents choose to update. We use a general formulation where updating occurs when a function of past and current economic outcomes is larger than a (possibly random) threshold variable. We discuss various microfoundations for this general specification before discussing how models of this class can be efficiently estimated via MCMC methods. Finally, we bring this machinery to bear on the question of when firms and households in the US have shifted their views on both fiscal and monetary policymakers since World War II.