Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-experiment

A law issued to combat political corruption and ma.a in.ltration of city councils in Italy has resulted in episodes of large, unanticipated, temporary contractions in local public spending. Using these episodes as instruments, we estimate the output multiplier of spending cuts at provincial level – controlling for national monetary and .scal policy, and holding the tax burden of local res- idents constant – to be 1.2. The effects of lagged spending, assumed exogenous to current output, bring this estimate up to 1.8. These results suggest that local spending adjustment may be quite consequential for local activity.