The political economy of regional development: Evidence from the Cassa per il Mezzogiorno

Institutional design can shape the political economy of regional development programmes, ultimately affecting their overall efficacy. We test this hypothesis in the context of the Cassa per il Mezzogiorno, a large-scale place-based policy aimed at fostering industrial development in Southern Italy (1950–1984). In 1971, authority over fund allocation was transferred from a centralised committee to newly established regional governments. Combining unique historical data on local administrators with detailed project-level information, we find that, after devolution, municipalities governed by the same party in power at the regional level (aligned) received more funds compared to unaligned ones. In the long run, aligned municipalities received a greater number of smaller projects, predominantly public works. This pattern intensified in municipalities characterised by higher pre-reform corruption, lower industrial capacity, and larger electorates, consistent with a logic of broad electoral coverage rather than developmental targeting. We also show that the positive association between funding and long-term employment growth weakens substantially after the reform, particularly in aligned municipalities. These findings suggest that, in institutionally fragile contexts, devolution can increase exposure to political distortions and undermine the growth-enhancing potential of place-based policies.