Market Structure and Extortion: Evidence from 50,000 Extortion Payments

Abstract: How do gangs compete for extortion? Using detailed data on individual extortion payments to gangs and sales from a leading wholesale distributor of consumer goods and pharmaceuticals in El Salvador, we document new evidence on the determinants of extortion payments and the economic costs of extortion via pass-through. We exploit a 2016 non-aggression pact between gangs to examine how collusion affects extortion in areas where gangs previously competed. While the non-aggression pact led to a large reduction in violence, we find that it increased extortion by 15% to 20%. Much of the increase in extortion was passed-through to retailers and consumers: we find a large increase in prices for pharmaceutical drugs and a corresponding increase in hospital visits for chronic illnesses. The results shed light on how extortion rates are set and point to an unintended consequence of policies that reduce competition between criminal organizations.