DP8305 Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-experiment

Author(s): Antonio Acconcia, Giancarlo Corsetti, Saverio Simonelli
Publication Date: April 2011
Keyword(s): government spending, instrumental variables, multiplier
JEL(s): C26, E62, H54
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8305

We estimate the multiplier relying on differences in spending in infrastructure across Italian provinces and an instrument identifying investment changes that are large and exogenous to local cyclical conditions. We derive our instrument from the Law mandating the interruption of public work on evidence of mafia infiltration of city councils. Our IV estimates on cross sectional data allow us to address common problems in time series analysis, such as the risk of estimating spuriously high multipliers because of endogeneity and reverse causation, or the risk of confounding the effects of fiscal and monetary measures. Accounting for contemporaneous and lagged effects, and controlling for the direct impact of anti-mafia measures on output, our results suggest a multiplier as high as 1.4 on impact, and 2 including dynamic effects.