All is not lost: Organized crime and social capital formation

We investigate how institutional quality influences social capital by exploiting a policy designed to fight organized crime in Italy: the dismissal of city councils following criminal infiltration into local governments. To measure social capital, we employ a novel, fine-grained indicator based on Italy’s 5 per Mille provision, which allows taxpayers to allocate a portion of their income tax to non-profit organizations. Using a difference-in-differences strategy, we find that city council dismissals lead to a significant increase in social capital. We document that the perceived strengthening of law enforcement is the primary mechanism through which city council dismissals enhance social capital. • We examine how the enhancement of institutional quality impacts the formation of social capital in Italian municipalities. • We introduce a novel, fine-grained and time variant measure of social capital based on a tax provision (5 per Mille). • City council dismissals lead to a significant increase in social capital. • The perceived strengthening of law enforcement is the primary mechanism through which city council dismissals enhance social capital.