THE EFFECT OF MAFIA ON PUBLIC TRANSFERS

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.