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States commonly rely on paramilitary forces to support their counter-insurgency efforts and often grant them special legal status or official recognition to consolidate their alliance. Moving beyond the battlefield, this study analyzes the effects of legalizing paramilitary groups on various government policies in Colombia. The study shows that formally recognizing paramilitary groups increases their coercive capabilities and allows them to shape local government institutions and policies in ways that favor the economic opportunities of local private elites. By relying on a new database of legally recognized paramilitary jurisdictions in Colombia and using a Regression Discontinuity research design, results show that the legalization of paramilitaries influences local government institutions that increase their use of violence, forcibly reshape land property rights, enable illicit economies, impose predatory taxation, engage in spendthrifty local finances, and implement regressive social policies.