Breaking the Ties between the Mafia and the State: Evidence from Italian Municipalities

Abstract

The impact of organized crime on local economies is inherently hard to measure due to the lack of exogenous variation in criminal activity and data quality. I address these challenges by exploiting the timing of the dismissal of public elected officials in Italian municipalities (when the city council is found to be infiltrated by mafia) as a source of plausibly exogenous variation, and by combining this approach with the use of large administrative datasets. I document that the three external commissioners temporarily cut public investment and public procurement. I find that connected firms experience a sharp reduction in the probability of winning a call for bidders after the takeover. Higher exit rates and the lower number of public procurement contracts awarded only partially explain this sharp drop; overall my findings are consistent with stigma being associated to connected firms and lasting longer than takeover itself. I do not find any evidence that this policy negatively impacts local formal businesses and workers. More specifically, I find suggestive evidence of more churning in the economy, and I do not detect any negative consequences for local workers in terms of employment.