The "Control Paradox" in High-Crime Environments : empirical Evidence from a Large-Scale Analysis on Italian SMEs

This study examines a"control paradox" through the lens of institutionalized agency theory: under severe institutional decay, firms may rationally weaken, rather than strengthen, governance as a strategic adaptation. Using firm-level data on 13,084 Italian SMEs matched with a provincial organized crime index, we run robust regressions linking criminal exposure to a composite measure of the size of SMEs' two key internal boards (Board of Directors and Board of Statutory Auditors). We find that higher organized crime intensity is associated with smaller administrative and control boards, even after accounting for firm and environmental determinants. Our findings contribute to theory by demonstrating the boundary conditions of traditional agency and risk-based governance models, showing how institutional decay systematically reshapes agents' incentives and thereby the role of internal governance as an adaptive, agentic response. [Publisher's text]