The effects of extortion and security device adoption on entrepreneurial entry and exit: Evidence from Guatemala

Using survey data and administrative records from franchise stores of a multinational company operating in Guatemala’s food retail sector, we document stylized empirical facts about extortion of low-income microentrepreneurs and the protective impact of security cameras. Extortion curtails market entry, increases exit, and lowers economic competition. Security cameras reduce exit and improve competition. To rationalize these findings, we propose a standard model of industry dynamics in which we incorporate extortion as a sales tax and security devices as a costly investment that lowers the probability of victimization. We structurally estimate the model to conduct counterfactual policy simulations and compare the effectiveness of security cameras with that of alternative security devices. • Local extortion rates correlate negatively with the entry of low-income entrepreneurs into the market and positively with market exit and economic concentration. • The installation of security cameras increases the probability of enterprise survival and reduces economic concentration. • Security cameras work by reducing entrepreneurs’ perceived probability of extortion, as reflected by an expansion in afternoon entrepreneurial hours of operation. • Incorporating extortion into an equilibrium model of industry dynamics shows that security cameras fall in the middle of the effectiveness range compared to all other counterfactual security devices.