February 24, 2014
Using the case of the cocaine trade in Mexico as a relevant and salient example, this paper shows that scarcity leads to violence in markets without third party enforcement. We construct a model in which supply shortages increase total revenue when demand is inelastic. If property rights over revenues are not well defined because of the lack of reliable third party enforcement, the incentives to prey on others and avoid predation by exercising violence increase with scarcity, thus increasing violence. We test our model and the proposed channel using data for the cocaine trade in Mexico. We found that exogenous supply shocks originated in changes in the amount of cocaine seized in Colombia (Mexico's main cocaine supplier) create scarcity and increase drug-related violence in Mexico.
In accordance with our model, the effect of cocaine scarcity on violence is larger near US entry points; in locations contested by several cartels; and where, due to high support for the PAN party, crackdowns on the cocaine trade have been more frequent. Our estimates suggest that, for the period 2006-2010, scarcity created by more efficient interdiction policies in Colombia may account for 21.2% and 46% of the increase in homicides and drug-related homicides, respectively, experienced in the north of the country. At least in the short run, scarcity created by Colombian supply reduction efforts has had negative spillovers in the form of more violence in Mexico under the so-called War on Drugs.
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