"Doing Business Below the Line: Screening, Mafias and Public Funds"
(co-authored with Gianmarco Daniele, Bocconi University)
Gemma Dipoppa, PhD Candidate, Political Science Department, University of Pennsylvania.
Joshua Kertzer, Faculty Associate; Chair, Weatherhead Research Cluster on International Security. Paul Sack Associate Professor of Political Economy, Department of Government, Harvard University.
Criminal organizations make large profits misappropriating public funds, causing an economic loss for the state and the strengthening of criminal groups. This paper evaluates a policy aimed at fighting this phenomenon and the displacement effects the policy caused. In 2013, the Italian government enforced a law screening mafia-related firms out of the application for European subsidies when applying for more than 150,000 Euros. We exploit this time-varying discontinuity to identify firms self-selecting below the threshold after the law was approved. We observe a large jump in firms applying for just below 150,000 Euros after 2013. Firms sorting are more likely to come from mafia-affected cities, display worse performances, operate in typical mafia-affected sectors and have balance sheet indicators suggesting potential for money laundering. The jump we identify corresponds to 3.8\% of all subsidies assigned in our sample. Our findings shed light on the extent to which mafia-connected firms misappropriate public funds and on the effectiveness of screening policies applied discontinuously when mafias behave strategically.