Will Violent Crime Incentivize the Hiding of Small Firms?

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This paper examines the relationship between exposure to violent crime and firm informality. I employ a rotating panel survey matched to municipal homicide rates and temperature as an instrument and find that exposure to violent crime causes firms to become informal. The hypothesis is that losses derived from crime may take away income that could otherwise be used to afford formality. Also, firms may prefer to stay underground to avoid disclosing their existence to criminals. I find that exposure to violent crime promotes informality. On average an additional homicide per 10,000 people each quarter increases the probability to be informal between 0.6 percentage points and 1.1 percentage points. These results are further corroborated when using temperature as an instrumental variable, which indicates that these estimates range between 13.7 percentage points and 17.3 percentage points.

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