Economic shocks and crime: Evidence from the crash of Ponzi schemes

•In 2008 Ponzi schemes crashed in Colombia affecting hundreds of thousand of investors who lost tens of millions of dollars.•This negative shock increased redistributing crime, especially shoplifting and robbery.•Grand larceny and violent crime did not react differentially in affected districts.•Crime increased in places with relatively weaker law enforcement institutions and relatively low access to credit.

In November 2008, Colombian authorities dismantled a network of Ponzi schemes, making hundreds of thousands of investors lose tens of millions of dollars throughout the country. Using original data on the geographical incidence of the Ponzi schemes, this paper estimates the impact of their breakdown on crime. We find that the crash of Ponzi schemes differentially exacerbated crime in affected districts. Confirming the intuition of the standard economic model of crime, this effect is only present in places with relatively weak judicial and law enforcement institutions, and with little access to consumption smoothing mechanisms such as microcredit. In addition, we show that, with the exception of economically-motivated felonies such as robbery, violent crime is not affected by the negative shock.