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The effect of organized crime on public funds

Author

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  • Guglielmo Barone

    () (Bank of Italy)

  • Gaia Narciso

    () (Trinity College Dublin)

Abstract

Organized crime is widely regarded as damaging to the economy, to say nothing of people�s lives. Yet little is known about the mechanism at work. This paper helps fill the gap by analyzing the impact of organized crime on the allocation of public subsidies to businesses. We assemble an innovative data set on Italian mafia crimes at municipal level and test whether organized crime diverts public funding. We exploit exogenous variations at the level of municipalities to instrument current mafia-style activity by using exogenous shifters of land productivity in the 19th century. Our results show that the presence of organized crime positively affects both the extensive margin (probability of funding) and the intensive margin (amount of public funding to enterprises). The impact is economically relevant and equal to at least one standard deviation of the dependent variable. Organized crime is also found to cause episodes of corruption in the public administration. A series of robustness checks confirm the findings. Our results suggest that geographically targeted aid policies should be careful to take local crime conditions into account.

Suggested Citation

  • Guglielmo Barone & Gaia Narciso, 2013. "The effect of organized crime on public funds," Temi di discussione (Economic working papers) 916, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_916_13
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0916/en_tema_916.pdf
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    References listed on IDEAS

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    1. Fernanda Brollo & Tommaso Nannicini & Roberto Perotti & Guido Tabellini, 2013. "The Political Resource Curse," American Economic Review, American Economic Association, vol. 103(5), pages 1759-1796, August.
    2. Bernini, Cristina & Pellegrini, Guido, 2011. "How are growth and productivity in private firms affected by public subsidy? Evidence from a regional policy," Regional Science and Urban Economics, Elsevier, vol. 41(3), pages 253-265, May.
    3. Emilia Bonaccorsi di Patti, 2009. "Weak institutions and credit availability: the impact of crime on bank loans," Questioni di Economia e Finanza (Occasional Papers) 52, Bank of Italy, Economic Research and International Relations Area.
    4. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    5. Oriana Bandiera, 2003. "Land Reform, the Market for Protection, and the Origins of the Sicilian Mafia: Theory and Evidence," Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 218-244, April.
    6. Paolo Buonanno & Ruben Durante & Giovanni Prarolo & Paolo Vanin, 2012. "Poor institutions, rich mines: resource curse and the origins of the Sicilian mafia," Working Papers 2012/29, Institut d'Economia de Barcelona (IEB).
    7. Bronzini, Raffaello & de Blasio, Guido, 2006. "Evaluating the impact of investment incentives: The case of Italy's Law 488/1992," Journal of Urban Economics, Elsevier, vol. 60(2), pages 327-349, September.
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    Citations

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    Cited by:

    1. Roland Meeks & Benjamin Nelson & Piergiorgio Alessandri, 2017. "Shadow Banks and Macroeconomic Instability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1483-1516, October.
    2. Naddeo, Andreina, 2014. "How crime affects the economy: evidence from Italy," MPRA Paper 65419, University Library of Munich, Germany.
    3. repec:eee:ecmode:v:68:y:2018:i:c:p:514-528 is not listed on IDEAS
    4. Sara Formai, 2013. "Heterogenous firms and credit frictions: a general equilibrium analysis of market entry decisions," Temi di discussione (Economic working papers) 940, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    organized crime; public transfers; corruption;

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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