Firms and Labor in Times of Violence: Evidence from the Mexican Drug War

I study how industrial development and employment in an emerging economy are affected by urban violence due to drug trafficking. Employing rich longitudinal plant-level data covering all of Mexico from 2005–2010, exploiting plausibly exogenous spatiotemporal variation homicide rates during the outbreak drug-trade related Mexico, commonly referred as Mexican Drug War, show that a violent environment has significant negative impact on manufacturing plants’ output, product scope, employment, capacity utilization. The is very heterogeneous among plants. Studying within cross-plant heterogeneity points two underlying channels through which War affects firms: induced reduction local demand drop labor supply participation. output sensitivity plants conflict increases less diversified, locally selling sourcing with lower wages higher share unskilled female workers. results both co-exist, reallocating resources smaller, local, female-intensive toward bigger more diversified ones, rise distortive effects domestic Mexico.