The Macroeconomics of Illegal Behavior

In Chapter 1, I explore the aggregate effects of skin color discrimination. I use data from the Latin American Public Opinion Project and find 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 tone earn half as much as whites, have one year less of instruction, and report worse health outcomes. I rationalize those gaps through 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 (that is, discrimination) inhibits human capital accumulation. The combined effects of both lower wages and human capital create a wealth gradient by skin color. In a counterfactual exercise, in which discrimination is not allowed, output would increase close to 8%, wealth would distribute 7.2% more equally, and consumption would rise for all skin-color groups.

In Chapter 2, I study how imperfect law enforcement affects 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 Chihuahua, a state with significant drug cartels. 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 law enforcement results 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.