The Mafia's Economic Grip: Firm Efficiency and a Composite Indicator of Organized Crime

ABSTRACT In Italy, organized crime poses a significant economic challenge as it reduces productivity and contributes to regional inequalities. This study investigates the influence of mafia activity on firm efficiency, with a specific focus on civil engineering companies. A composite indicator of organized crime was developed to measure its presence at the municipal level, and stochastic frontier models were employed to assess firm efficiency and input misallocation across Italian municipalities. We also estimate an Institutional Quality Indicator (IQI) to account for the impact of local institutional effectiveness on firm performance, with the results showing that higher IQI levels are associated with lower inefficiency. The findings indicate that criminal activities significantly hinder efficiency, especially in areas where organized crime is pervasive. These results underscore the urgent need for strategies to shield firms from organized crime, foster growth, and facilitate regional development.