Predation, Protection and Productivity: A Firm-Level Perspective

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 142 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.