Reclaiming Neighborhoods: Violent Crime and Business Growth
Violence is widespread and a major concern in Latin America, and one in four firms in the region identifies crime as a major constraint on its operations. Can reducing exposure to violence help local businesses grow, and through which channels? I study this question through one of the largest policing interventions in the developing world: the staggered rollout of Rio de Janeiro’s Pacifying Police Units, which sharply reduced violence in some of the city’s most violent neighbourhoods. I link the intervention’s boundaries and dates to geocoded administrative records for formal establishments and workers, comparing firms in earlier- and later-treated areas. One year after treatment, incumbent firms had 3.1 percent more workers and 4.1 percent higher wage bills, and four or more years later, these gains reached 24.2 and 26.2 percent, respectively. The gains were concentrated among firms with fewer than five workers, and firm entry also rose. Customer-facing firms show no clear advantage in employment growth or entry, offering little support for customer inflows as the main explanation. Among small incumbents, higher-paying firms expand more and new hires are more educated and experienced, while wages within firms show no detectable increase, a pattern consistent with an increase in labour supply to treated areas. Under benchmark assumptions, a model of local labour markets attributes most of the small-firm employment response to improved access to workers, with a smaller contribution from reduced crime-related production costs. These findings suggest that crime reduction can help small firms grow by widening the pool of workers willing to take jobs in previously unsafe areas.