Natural Resources and Local Communities: Evidence from a Peruvian Gold Mine

Forthcoming in AEJ Economic Policy: This paper examines the local economic impact of Yanacocha, a large gold mine located in Northern Peru. Using annual household data from 1997 to 2006, we find robust evidence of a positive effect of the mine's demand of local inputs on real income. The effect, an average 1.7% per 10% additional mine's purchases, is only present in the mine's supply market and surrounding areas. Results suggest that the effect is channelled to rural areas through an increase in the price of locally produced food. We examine and rule out that the effects are explained by a fiscal revenue windfall, or by other plausible mechanisms. Taken together, our results underline the potential of backward linkages from extractive industries to create positive spillovers in less developed economies.