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The Effect Of Mafia On Public Transfers

Guglielmo Barone
and
Gaia Narciso

IIIS Discussion Paper No. 398

Abstract
This paper analyzes the impact of organized crime on the allocation of public transfers. We assemble an innovative data set on Italian mafia and public funds to businesses at municipality level and instrument current mafia activity with rainfall in the XIX century and geographical shifters of land productivity. We show that organized crime greatly increases the amount of public funds to businesses. Mafia is also found to lead to episodes of corruption in the public administration sector. Our results suggest that the design of geographically targeted aid policies should take into account local crime conditions.

(JEL H4, K4, O17)

Non technical summary
Organized crime is widely regarded as damaging to economic outcomes. Yet little is known about the mechanism at work. This paper contributes to filling this gap by analyzing the impact of organized crime on the allocation of public subsidies to businesses. We focus on Sicilian mafia and measure its presence using a unique data set, which provides detailed information on crime at municipality level, by article of the Italian Penal Code, over the period 2004-2009. Public transfers are measured by aggregating the amount of funds transferred to firms at municipality level under Law 488/92. These funds have for many years been the main policy instrument for reducing territorial disparities in Italy by offering a subsidy to businesses willing to invest in poorer regions. The research finds that:

  • Mafia diverted about 35% of the total amount of public transfers.
  • Organized crime pockets at least part of the disproportional amount of funds by creating fictitious firms and by corrupting public officials who play a role in the funding allocation.
  • The positive relationship between mafia presence and public transfers is not due to a more generous attitude of the State towards areas with mafia presence. If anything, these areas are underfunded in terms of expenditure on education relative to those where mafia is absent.

The results indicate that the design of geographically targeted aid policies, such as European Structural Funds, should be supported by detailed analysis of local crime activities, in order to prevent that part of the money feeds into organized crime.

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Last updated 28 August 2014 by IIIS (Email).