Cohesion or collusion? EU funds in places with corrupt local institutions

This paper provides the first analysis of how local institutional quality affects the distribution of EU funds across private beneficiaries, public entities, and local governments. Using high-quality Italian administrative data on city council dismissals due to collusion with organised crime, we examine whether corruption affects municipal control over EU resources. We apply a staggered difference-in-differences model and event studies and find that corrupt local governments receive significantly fewer EU funds for their own operations. However, this is not a consequence of efficient corruption detection, but rather a strategic choice. Corrupt administrations avoid larger EU projects to sidestep stricter anti-mafia regulations. This distortion weakens Cohesion Policy’s impact, deprives communities of critical investment, and hampers local economic growth. While Italy’s anti-mafia laws appear effective in blocking criminal access to EU funds, our findings expose the adaptability of organised crime, which simply switches its operations below existing regulatory thresholds. The takeaway is clear: good institutions matter. Where corruption thrives, EU funds do not disappear entirely, but they flow differently, fundamentally to smaller, more opaque projects. Stronger oversight is essential to ensure that Cohesion Policy delivers on its promise.