Abstract

We report results from a randomized policy experiment designed to test whether increased audit risk deters rent extraction in local government procurement and service delivery in Brazil. Our estimates suggest that temporarily increasing annual audit risk by about 20 percentage points reduced the share of audited resources involved in corruption by about 10 percentage points and the proportion of procurement processes with evidence of corruption by about 15 percentage points. The corruption reduction is entirely driven by procurement modalities that restrict competition and afford discretion to procurement officials in their choice of suppliers. In contrast, we find no evidence that increased audit risk affected the quality of publicly provided preventive and primary health care services - measured based on user satisfaction surveys - or compliance with eligibility requirements for the conditional cash transfer program Bolsa Família - measured through household visits by auditors. We provide a simple model that rationalizes these findings and discuss implications for audit design.