Law enforcement, municipal budgets and spillover effects: Evidence from a quasi-experiment in Italy

In this paper, I empirically investigate the presence of spillover effects resulting from the strengthening of law enforcement against corruption in local governments. Specifically, I take advantage of an Italian law that empowers the central government to replace democratically elected municipal officials who are potentially connected with the mafia with a commission of non-elected administrators. Fixed-effects model estimates that focus on a sample of municipalities from three Italian regions (Campania, Calabria and Sicilia) for the period 1998 to 2013 show that in municipalities where the city council is dismissed because of the presence of mafia-connected officials, there is a reduction in public investments in neighboring municipalities. Additional empirical evidence suggests that this reduction may be because law enforcement spillovers reduce misconduct in neighboring municipalities.