Political Corruption and Development in Brazil: Do Random Audits of Corruption Increase Economic Activity?

The government of Luiz Inacio Lula da Silva implemented a random audits program aimed at curbing municipal corruption in 2003. Recent literature found evidence that these audits successfully reduced corruption (Avis, Ferraz, and Finan 2018) and improved firm performance (Colonnelli and Prem 2017). These latter findings are obtained using survey data concerning formal activity alone. However, many formal firms operate partially “off the books”. Further, these audits likely affect citizen tolerance for corruption in general potentially affecting other facets of governance including informality enforcement. This has its own consequence on economic growth. Thus, an analysis including all forms of economic activity is warranted. We utilize difference-in-difference and matching techniques in conjunction with broad measures of total economic activity to test if audited municipalities improved relative to their non-audited counterparts. We find evidence of a slight decline in subsequent economic activity; we find no evidence of any benefit. A preliminary analysis suggests that this decline may stem from increased informality enforcement.