The first economic explorations of organized crime date back to the seminal papers of Becker, (1968) Schelling (1971) and Ehrlich (1973).
Following those studies, empirical literature on the economics of crime has focused on the estimate of the costs of organized crime through different methods (Soares, 2009) and it has little explored the relationship between organized crime and quality of the institutional context in both directions. A stream of research explores the origins of organized crime. They are largely associated to relative endowment of natural resources (resource curse) and weak institutional environment in Sicily (Gambetta, 1993; Skaperdas, 2001; Bandiera, 2003; Dimico et al., 2012; Konrad and Skaperdas, 2012; Buonanno et al., 2015) and Russia (Frye and Zhuravskaya, 2000). More specifically Dell (2011) assesses the effects of law enforcement on drug-trade related violence and routes. The findings suggest that organized crime emerges and develops in those areas where it responds to society's needs that are not satisfied by formal institutions (Pinotti, 2015a). Public spending represents a big piece of the story, as the presence of weak institutions allows the spread of organized crime (and no other kinds of violent crimes) to be predicted by the increase in public spending (Gennaioli and Onorato, 2010).
A second stream of research looks at poor economic performance, along different outcomes, as the result of unfavorable institutional environment originated by the presence of organized crime. Large evidence exists on the effects of organized crime on government efficiency (Godson and Williams, 1998; Allum and Siebert, 2003), money laundering (Schneider, 2010), and economic development and productivity through different channels (e.g. Felli and Fria, 1999; Tullio and Quarella, 1999; Felli and Fria, 2000; Peri, 2004; Centorrino and Ofria, 2008; Barone and Narciso, 2015; Pinotti, 2015a).
52
The main idea is that the activity of organized crime imposes negative externalities, as it contributes to worsen the institutional environment, which, in turns, represents a source of inefficiencies and of low productivity growth (Felli and Tria, 2000).
Peri (2004) shows the existence of a strong relationship between organized crime (proxied by murder rate) and low economic development, even after controlling for other economic and geographic dimensions. The presence of criminal organizations makes markets less transparent as they operate through apparently clean (legal) firms in order to have access to more, even public, resources with the use of violence rather than because of higher competitiveness (Felli and Fria, 1999). Organized crime is found to divert the allocation of public subsidies to business at municipality level (Barone and Narciso, 2015): the presence of criminal organizations enhances the probability of obtaining funding and the relative amounts of public funds and it leads to episodes of corruption in the public administration. Explorations of the joint effect of organized crime and government expenditures on Southern Italy convergence demonstrate that the latter increases the financial strength of organized crime and its control over the territory, with strong negative consequences on GDP per capita and growth rate (Tullio and Quarella, 1999). Pinotti (2015a) demonstrates that the impact on GDP per capita reflects a net economic loss due to the replacement of private capital with less productive public investments, rather than a reallocation of activity from the official to the unofficial sector, arguing that this 'finding is consistent with theoretical models of political capture, in which criminal organizations secure profit opportunities with the public sector by either threatening or corrupting politicians' (p. F172). In this regard, other studies concern specifically, the relation with the political environment, as a measure of the institutional quality. It is found that, for the period 1946-1992 in Sicily, organized crime negatively affects electoral competitions, by 'supporting' those political parties that secure mafia services in exchange of economic advantage for their activities in the construction industry (De Feo and De Luca, 2013). This study points out that the strongest party is the one more willing to pay for mafia services and that the higher the political competition and the efficiency of the mafia, the larger the volume of electoral trade. Consequently, negative effects are found on the quality of the political class (Pinotti, 2013; Daniele and Geys, 2015). Indeed corruption and crime are found to be systematically related across countries, but criminal organizations may exercise control over politicians' decisions also through means of threat (Pinotti, 2005a).
Negative effects on labor productivity are identified in southern Italy regions mainly in the building sector, one of the most infiltrated by Italian mafia, and with some approximations also in other industries, such as: agriculture, forestry and fisheries; trade; hotels and restaurants; transports and communications; manufacturing (Centorrino and Ofria, 2008).
53
Another channel through which crime contributes to worsen the institutional environment and economic outcomes is the labor market, with a lower employment rate identified in regions mostly ridden by mafia (Tullio and Quarella, 1999). Furthermore, signals of unfavorable socio- institutional environment, which derive from high level of some crimes (such as organized crime), represent a strong deterrent for foreign direct investments and economic development (Daniele and Marani, 2011).
At a more micro level, Albanese and Marinelli (2013) estimate production function over a stratified sample of Italian firms and they find a negative effect on their productivity. In another study (Bonaccorsi di Patti, 2009), organized crime is found to influence access to credit and evidence is brought on the effects on bank loans pricing: crime-related risk turns out to impact on the cost of short-term credit and to increase the demand for collateral.
Recently a study of the Bank of Italy (Donato et al., 2013) investigates the relationship between sequestrated and confiscated firms and the bank system. They find that after this legal measure, firms are not penalized under the credit profile with respect to other firms operating within the same industry, same geographical areas or exhibiting similar mode of governance.
Finally, Matrobuoni (2015) analyzes the economic value of criminal network connections inside the American-Italian ‘Cosa Nostra’, between the 50s and 60s, and uses this particular setting to point out the importance of networks for economic success.
As we can easily observe, up to this point scholars focused more on the macroeconomic consequences of organized crime, while few studies attempted to assess at a micro level the costs imposed on socio-economic systems, in terms of poor institutional environment and economic performance.
2.1. Hypothesis
Organized crime is largely found to influence the quality of institutions (e.g. Centorrino and Ofria, 2008; Peri, 2004; Pinotti, 2015a).
The presence of cartels imposed by criminal organizations may represent a source of negative externalities, as they undermine the economic activities of non-criminal firms and, at the same time, they bring inefficiencies as they do not have to respond to competition pressures (Felli and Tria, 2000). Furthermore, they are capable to divert public resources (Barone and Narciso, 2015) with the use of violence and by systematically resorting to corruption. Such an institutional environment represents a source of low productivity growth.
54
Overall effects on local economic and noneconomic systems of the pervasiveness of organize crime damage directly all the firms, regardless of their size and sector (Albanese and Marinelli, 2013).
Starting from these considerations, we develop the following hypothesis.
Hp: Criminal firms negatively affect the performance of non-criminal competitors.