Crime and Output: Theory and Application to the Northern Triangle of Central America

Abstract

This paper presents a structural model of crime and output. Individuals make an occupationalchoice between criminal and legal activities. The return to becoming a criminal isendogenously determined in a general equilibrium together with the level of crime andeconomic activity. I calibrate the model to the Northern Triangle countries and conductseveral policy experiments. I find that for a country like Honduras crime reduces GDP byabout 3 percent through its negative effect on employment indirectly, in addition to directcosts of crime associated with material losses, which are in line with literature estimates.Also, the model generates a non-linear effect of crime on output and vice versa. On average Ifind that a one percent increase in output per capita implies about 1/2 percent decline in crime,while a decrease of about 5 percent in crime leads to about one percent increase in output percapita. These positive effects are larger if the initial level of crime is larger.

Keywords: Economic conditions, Supply and demand, Economic growth, Labor market policy, Unemployment, Crime, Employment, Growth, WP, crime level, indirect cost, criminal activity, homicide rate, tightness

JEL Classification: J24, J30, E26, E01, E2, D4, O4, G21