Local Government and Innovation: The Case of Italian Provinces

Abstract

This paper evaluates the effect of decentralization on innovation at the provincial level in Italy. We exploit quasi-natural experiments associated with three waves of reforms occurred in 1992, 2001 and 2004, to establish 8, 4, and 3 new provinces, respectively. Using a difference-in-difference estimation approach, we find evidence of a significant detrimental effect of (further) decentralization on innovation for Northern and Central Italian provinces. We suggest a potential mechanism that may explain the reduction in innovation associated with the aforementioned reforms. We argue that this finding can be rationalized with the costs imposed by the mafia transplantation phenomenon, as we find that the new provinces that were more exposed to mafiosi in confino reduced their innovation output more extensively. We perform a number of robustness checks that corroborate our main findings.