Credit constraints vs lack of demand. An analysis of Italian firms' borrowing demand in the construction industry

This paper studies the demand for bank loans by Italian construction firms. Using the Bank of Italy's Survey of Construction and Industrial Firms for 2018-2022, we show that most firms report no intention to apply for a loan. Besides renewals of existing credit lines and credit rationing by banks, we explore a third explanation: firms may obtain funds in a parallel, illegal market controlled by organized crime. We match the survey with province-level data on real estate confiscated from the mafia, used as a proxy for mafia territorial control, and estimate a multinomial logit model of firms' intention to apply for a loan. We find that stronger mafia control is associated with a significantly lower probability of demanding, or intending to demand, a bank loan. This result holds after controlling for firm characteristics, liquidity, and credit conditions, and lack of demand is not associated with worsening credit conditions. The evidence is consistent with organized crime pre-empting firms' demand for formal credit even in the absence of credit rationing. By focusing on demand rather than supply, the paper complements existing evidence on how organized crime distorts credit markets.