The contribution starts from the fact that Southern local institutions will receive significant funding from the Italian PNRR in the coming years, raising concerns among policymakers and analysts about their capacity to manage these resources effectively.

The study examines the economic impact of public capital in Italian regions over the past two decades, focusing on the role of local bodies in Southern Italy to assess their ability to realize public investments. The regional public capital stock series has been computed using Territorial Public Accounts (CPT) data, which allows for disaggregation by different administrative bodies.

An augmented production function is estimated to assess the impact of public capital on regional value-added, using lagged capital stock and labor as instruments in a 2SLS approach to address endogeneity issues. The results show an overall positive effect of public capital, but investments by local bodies in Southern regions have a much lower impact compared to those in Northern Italy, primarily due to the lower institutional quality in the South.

Enhancing institutional quality, particularly in Southern Italy, is crucial for maximizing the effectiveness of the PNRR. Short-term solutions include expert and central government support, while long-term efforts should focus on improving human capital and changing social norms.