Periodic Reporting for period 1 - FIBRE (Firms' Behaviour in Rough Environments)
Reporting period: 2022-11-01 to 2025-03-31
FIBRE Project (FIrms’ Behaviour in Rough Environments) aims to analyse how firms’ optimal behaviour changes in contexts affected by distortions related to the presence of organised crime or inefficient public procurement, and to measure the resulting welfare losses. How firm activity matters for long-rung growth and prosperity and the importance of the allocation of productive resources across firms as crucial determinant of aggregate output and productivity are topics that have been widely explored in the economic literature. Yet, there is still limited research examining the specific sources of market distortions. FIBRE aims to fill this gap examining two possible sources of market distortions: organised crime and inefficient public procurement to firms. FIBRE answers two crucial questions: (i) how the infiltration of organised crime impact firms’ behaviour and, in turn, shape aggregate outcomes; (ii) whether the efficiency through which a public resource is provided impacts firms’ behaviour and, consequently, implies aggregate costs. Answering these questions is of key importance for national and transnational policy makers in their efforts to guarantee a stable economic growth.
FIBRE's questions:
1- How the infiltration of organised crime impact firms’ behaviour and, in turn, shape aggregate outcomes:
I have published the paper “Uncovering Illegal and Underground Economies: the Case of Mafia Extortion Racketeering” at the Journal of Public Economics (Volume 227, 104997, 2023). In this paper, I propose a new approach to quantify the economic cost of hidden economies and apply it to the case of mafia extortion in Northern Italy. To quantify the extortion rate, unobserved in the data, I first show that extortion racketeering is linked to resource misallocation. Then, I implement a structural estimation based on matching the observed misallocation in markets defined as mafia-infiltrated, with that predicted from a model whose parameters are estimated using data on non-mafia markets or calibrated from the literature. The results suggest that the share of output that the mafia extorts from firms ranges between 0.5 and 5 percent of firm-level output for those firms that are subject to extortion, with an implied loss between 0.6 and 8 percent of aggregate value added.
I have further developed a project I started before my fellowship that provide novel evidence on how firm-level distortions affecting a sub-group of firms can have negative effects for the whole economy. Specifically, my paper (coauthored with Prof. Mathieu Couttenier and Dr. Nathalie Monnet) develops a novel approach to estimate the economic costs of conflict by leveraging production networks as the key mechanism through which localized disruptions propagate to unaffected areas. We apply this framework to the Maoist insurgency in Eastern India (2000–2009), combining reduced-form evidence with a structural analysis. Our findings reveal substantial spillover effects, indicating that even low-intensity conflicts can impose significant aggregate economic costs. A one-percentage-point increase in conflict-related losses is associated with an average annual decline of 0.236% in aggregate output. Explicit quantification of direct losses suggests total annual output reductions ranging from 1.2% to 2%. Strikingly, 73% of this loss is driven by propagation through the production network.
2- Whether the efficiency through which a public resource is provided impacts firms’ behaviour and, consequently, implies aggregate costs.
I, together with my coauthor Dr. Andrea Tulli, have collected a unique dataset that contains information on the universe of public auctions in the public work sector in Italy from 2007 to 2017, as well as accounting information on the universe of Italian construction sector firms for the same period.
We are currently working on a draft of the paper. In this project we examine how an exogenous increase in the allocative efficiency of public spending affects firm growth and, consequently, aggregate private sector performance. Specifically, we test whether firm growth differs when identical public resources are allocated to a firm selected via an efficient allocation mechanism—one that targets the most productive participant—as opposed to a firm selected randomly. Our findings indicate that a more efficient allocation of public spending significantly boosts firm growth in the short run. Specifically, our main results suggest that a one percent increase in the size of a contract awarded to a firm selected efficiently raises that firm's revenue by 7 percent more within the first three years, compared to a firm that receives the same resources via a lottery-like mechanism. At the aggregate level, we find that if all the auctions were carried out through the efficient format, aggregate productivity of the construction sector would increase by 0.6%.
1- How the infiltration of organised crime impact firms’ behaviour and, in turn, shape aggregate outcomes:
I have published the paper “Uncovering Illegal and Underground Economies: the Case of Mafia Extortion Racketeering” at the Journal of Public Economics (Volume 227, 104997, 2023). In this paper, I propose a new approach to quantify the economic cost of hidden economies and apply it to the case of mafia extortion in Northern Italy. To quantify the extortion rate, unobserved in the data, I first show that extortion racketeering is linked to resource misallocation. Then, I implement a structural estimation based on matching the observed misallocation in markets defined as mafia-infiltrated, with that predicted from a model whose parameters are estimated using data on non-mafia markets or calibrated from the literature. The results suggest that the share of output that the mafia extorts from firms ranges between 0.5 and 5 percent of firm-level output for those firms that are subject to extortion, with an implied loss between 0.6 and 8 percent of aggregate value added.
I have further developed a project I started before my fellowship that provide novel evidence on how firm-level distortions affecting a sub-group of firms can have negative effects for the whole economy. Specifically, my paper (coauthored with Prof. Mathieu Couttenier and Dr. Nathalie Monnet) develops a novel approach to estimate the economic costs of conflict by leveraging production networks as the key mechanism through which localized disruptions propagate to unaffected areas. We apply this framework to the Maoist insurgency in Eastern India (2000–2009), combining reduced-form evidence with a structural analysis. Our findings reveal substantial spillover effects, indicating that even low-intensity conflicts can impose significant aggregate economic costs. A one-percentage-point increase in conflict-related losses is associated with an average annual decline of 0.236% in aggregate output. Explicit quantification of direct losses suggests total annual output reductions ranging from 1.2% to 2%. Strikingly, 73% of this loss is driven by propagation through the production network.
2- Whether the efficiency through which a public resource is provided impacts firms’ behaviour and, consequently, implies aggregate costs.
I, together with my coauthor Dr. Andrea Tulli, have collected a unique dataset that contains information on the universe of public auctions in the public work sector in Italy from 2007 to 2017, as well as accounting information on the universe of Italian construction sector firms for the same period.
We are currently working on a draft of the paper. In this project we examine how an exogenous increase in the allocative efficiency of public spending affects firm growth and, consequently, aggregate private sector performance. Specifically, we test whether firm growth differs when identical public resources are allocated to a firm selected via an efficient allocation mechanism—one that targets the most productive participant—as opposed to a firm selected randomly. Our findings indicate that a more efficient allocation of public spending significantly boosts firm growth in the short run. Specifically, our main results suggest that a one percent increase in the size of a contract awarded to a firm selected efficiently raises that firm's revenue by 7 percent more within the first three years, compared to a firm that receives the same resources via a lottery-like mechanism. At the aggregate level, we find that if all the auctions were carried out through the efficient format, aggregate productivity of the construction sector would increase by 0.6%.
Additional research is needed to further study the relationship between legal firms and hidden economies. In this perspective, I have started a collaboration with the Uganda Revenue Authority, to get access to additional granular data on firms. In this project, my objective is to shed light on the role of the informal sector in shaping the behaviour of local firms belonging to the formal economy. Moreover, the project aims to provide evidence on the extent to which the interplay between formal and informal actors shapes aggregate outcomes in low-income countries. The project's conclusions will prove highly valuable to policymakers seeking to enhance the monitoring of the informal sector’s activities and their associated impacts on formal firms and other crucial aspect such as corruption, environmental impact, and conflict.