This paper studies the consequences of predation when firms deploy guard labor as a means of protecting themselves. We build a simple model and combine it with data for 144 countries from the World Bank enterprise surveys, which ask about firm-level experiences with predation and spending on protection. We use the model to estimate the output loss caused by the misallocation of labor across firms and from production to protection. The loss due to protection effort is substantial and patterns of state protection at the micro level can have a profound impact on aggregate output losses. Various extensions are discussed.
A pre-print version of the article can be downloaded here. Publication link to the American Economic Journal: Macro can be found here.
The American Economic Association also made a video of the findings of this research which can be accessed here. This video summarizes the paper nicely in simple words.
Keywords: predation, security, economic cost of crime, firm investments, justice, state capacity, labor misallocation.