One Kind of Lawlessness: Estimating the Welfare Cost of Somali Piracy

• Authors: Hannes Mueller.
• BSE Working Paper: 626 | September 15
• Keywords: Property rights , piracy , welfare loss , maritime transport , Somalia , private security , law and order
• JEL codes: K42, O18, F1, D74
• Property rights
• piracy
• welfare loss
• maritime transport
• Somalia
• private security
• law and order

This paper estimates the effect of piracy attacks on shipping costs using a unique data set on shipping contracts in the dry bulk market. We look at shipping routes whose shortest path exposes them to piracy attacks and find that the increase in attacks in 2008 lead to around a ten percent increase in shipping costs. We use this estimate to get a sense of the welfare loss imposed by piracy. Our intermediate estimate suggests that the creation of $120 million of revenue for pirates in the Somalia area led to a welfare loss of over $1.5 billion.