Abstract
We analyze the economic consequences on firm profitability, performance, and investments of having another firm in the same market affiliated with a criminal organization. We do so by evaluating the spillover effects of a law providing the judicial administration of organized crime firms through the imposition of external managers in order to remove the connection to the criminal organization, and at the same time guarantee the continuity of production. By using detailed information on more than 180,000 companies, we exploit the firms’ yearly variation in the exposure to criminal firms’ judicial administration in their market (in the same province and industry). The empirical design allows us to control for confounding effects at the firm, market, and year levels. The results show that there is a large, positive spillover from the enforcement law, suggesting that the burden the organized crime firms impose on other firms is very large. Firms’ performance and turnover increases by 2.2 and 0.7%, respectively, in the first 4 years after an organized crime firm enters the status of judicial administration. Investments measured by tangible and intangible assets increase with the number of firms entering into judicial administration by 0.75%. These results suggest that intensifying confiscation measures against criminal organizations has a strong positive effect on the economy.
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Notes
In a recent paper, Mirenda et al. (2019) study the mechanisms through which criminal organizations (in particular the ‘ndrangheta’) infiltrates into the legal economy and the consequences of infiltration on firms captured by the criminal organization in the Center and North of Italy. Organized crime typically targets firms in financial distress and potentially subject to shocks from the public sector demand. Mirenda et al. (2019) find that the firms captured by organized crime strongly increase their revenues.
Obviously, the loss that a criminal firm experiences through JA is more than offset by the increase in the performance of legal firms.
Confiscation takes place after a final judgement which involves the productive assets of the criminal organization has been taken.
The Italian companies that are required to deposit the balance sheet are the limited companies.
Given the large variation and the potential problem of mis-reporting, in the empirical analysis we follow the literature and we winsorize the outcome variables.
As we mentioned in the section describing the data, we have a potential issue of underreporting of firms entering JA. In practice, we may have firms entering JA, with this information not present in our data. Under our model specification, the estimated coefficient would be upward biased if the timing of the unobserved firms entering the status of JA is systematically concentrated in markets where are less firms observed entering JA. In all the other cases, the estimated coefficients represent a lower bound estimate of the true effects of JA on competitors. Issues of underreporting are common in the economics of crime (see for example Buonanno et al. 2018)
One challenge to identification of model 1 is that a JA event may bring about other type of enforcement interventions against crime that we are not able to observe. In this case we would attribute the effect of other interventions to JA, with the estimated effect that would be upward biased. However, unless these interventions are province and industry specific (namely, targeting only some specific industries in some provinces), the effect of other measures against organized crime should be absorbed by the large set of fixed effects.
Even within the same region we observe variation in the disposition time. For instance, in the Lombardy region (the most populated region of Northern Italy) disposition times vary from 400 days in Milano to 860 in Brescia. There are both factors at the district level and the judge level that explains this variability. Indeed, even within districts we observe variation in the length of trial depending, as illustrated by Coviello et al. (2015), on the flexibility that each judge has in the organization of his working time. In a different context, Drago et al. (2020) exploit variation in the disposition times with individual level data.
Leads and lags are estimated separately to preserve a meaningful number of observations.
As for the measurement issue of firms entering the status of JA, present the main results for the subsample present in AIDA and the subsample of additional firms identified from online newspapers. These results are reported in Figures A1–A6 in the appendix and suggest that the results are very similar whether we take only firms in Aida or firms from online newspapers.
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We thank the editor (Paolo Pinotti), two anonymous referees, and Marco Le Moglie for comments and suggestions that improved the paper.
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Calamunci, F., Drago, F. The Economic Impact of Organized Crime Infiltration in the Legal Economy: Evidence from the Judicial Administration of Organized Crime Firms. Ital Econ J 6, 275–297 (2020). https://doi.org/10.1007/s40797-020-00128-x
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DOI: https://doi.org/10.1007/s40797-020-00128-x