An offer I could not refuse

Imagine you are writing a daily investment blog, so you are constantly looking for fun things to write about. Then, one day, you open your mailbox and find a paper in there with the title:

Mafia firms and aftermaths

And the first sentence of the abstract goes on to say: “We use a unique and unexplored dataset to investigate the determinants and effects of mafia firms in Italy”.

I mean, how could I possibly resist writing about that?

Maria Alfano and Claudia Cantabene from the University of Campagna (where else?) and Damiano Silipo from the University of Calabria (c’mon, you are making my life too easy here) looked at all the companies in Italy that were seized by the government for mafia-related activities as recorded by the National Agency for the Management of Assets Confiscated to the Mafias (ANBC) since 2010. And yes, this agency really exists, and it covers not just the Sicilian Mafia as the name suggests, but also the other organisations active in Italy, like the Camorra in Campagnia, the ‘Ndrangheta in Calabria and the Sacra Corona Unita in Apulia.

Based on this dataset the researchers tried to identify how mafia firms get established, what factors allow them to grow and how they do business. Furthermore, the researchers tried to figure out what the impact of mafia firms is on the local economy.

First, they looked at the distribution and size of mafia firms across the country. To nobody’s surprise, mafia firms can be found predominantly in the south of Italy and the main industries the mafia firms specialise in are construction (presumably to have enough shovels to dig holes and enough concrete to fill them), retail and the hospitality industry. But there are also a surprising amount of real estate and IT firms operated by the mafia. 

Distribution of mafia firms by region

Source: Alfano et al. (2019).

On average, these mafia firms have higher revenues than legal local firms, but the standard deviation of revenues is also higher, leading the authors to conclude that “this implies that mafia firms undertake activities characterized by much higher returns but also higher risks”.

And while some people think that the mafia is in decline in Italy, the data on mafia firms contradicts this presumption. Mafia firms have grown rapidly, particularly in the south of Italy over the last decade. The research shows that mafia firms and implicitly the mafia as an organization has increasingly gone white collar. Today, mafia firms prefer corruption over violence, insofar as they tend to do their business in an orderly fashion and rely on corrupt officials to cover their activities. Municipalities that later were dissolved by the government due to a mafia takeover (yes, that happens regularly in Italy) had a significantly higher share of mafia firms in them. However, that does not mean that mafia firms aren’t violent. If bribery doesn’t work or if a corrupt town council is dissolved, then violence increases in that municipality indicating that there is a plan B for these companies. 

What is surprising to me is that mafia firms not only have negative effects on the economy. Yes, mafia firms hamper entrepreneurship in their communities and run their competitors into the ground. But that’s what capitalism is all about, isn’t it? The better companies grow while the smaller, less efficient businesses face creative destruction. 

But mafia firms allegedly also help mitigate the negative effects of recessions by reducing unemployment in bad times and migration from poorer regions to richer parts of the country. So, it isn’t all bad. One might almost think that in a recession, mafia firms are making offers, many unemployed can’t resist.