Fiscally responsible mafia clans

To work as an accountability mechanism, fiscal decentralization requires the democratic mechanism to function well. This is generally not the case where the quality of the institutional environment is weak, and local governments might be captured by local oligarchs. We explore this issue by studying how Italian municipalities reacted to an unexpected tax reform reducing tax autonomy at the local level. Focusing on three Southern provinces, where some municipal governments are captured by Camorra clans, our estimates suggest that captured municipalities are less responsive to incentives stemming from recentralization. We also observe a different recomposition of spending between the two groups, which we interpret – according to our theoretical model – considering the different degrees with which clans can extract rents from public expenditure.