Income Inequality and Violent Crime: Evidence from Mexico’s Drug War

Abstract: Evidence of a causal effect of inequality on crime is scarce in developing countries. This paper estimates the effect in a unique context: Mexico's Drug War. The analysis exploits a unique dataset containing inequality and crime statistics for more than 2,000 Mexican municipalities over a 20-year period. An instrumental variable for the Gini coefficient combines the initial income distribution at the municipality level with national trends. The results indicate that a one-point increment in the Gini between 2006-2010 translates into an increase of over 10 drug-related homicides per 100,000 inhabitants. These effects are smaller between 1990 and 2005. The fact that the effect found during the Drug War is substantially higher is likely because the cost of crime decreased with the proliferation of gangs (lowering the marginal cost of criminal behavior), which, combined with rising inequality in some municipalities, increased the expected net benefit of criminal acts after 2005