Changing the Face of Corruption: Audits, Substitution Between Forms of Corruption, and Public Sector Performance

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Several governments have tried to curb corruption via audits. However, audits inevitably reveal some forms of corruption better than others, and corrupt officials can adapt. Thus, could audits systematically increase the incidence of forms of corruption they do not reveal? If so, could this increase have permanent welfare consequences? This research project addresses these questions empirically. To do so, it exploits a Brazilian anti-corruption program which randomly selected thousands of local governments to be audited between 2003 and 2015. While this program successfully uncovered some forms of corruption, it did not uncover nepotistic practices. To measure the systematic incidence of this alternative form of corruption over time, this project uses information on the full names of the universe of mayors and public sector employees hired without a competitive civil service examination in Brazil, using surnames to identify family connections. The project then tests whether the incidence of nepotism is systematically - and permanently - greater in audited municipalities. To investigate implications for society's welfare, the project investigates whether audits, by inducing an increase in nepotistically hired bureaucrats, permanently reduce the quality of the bureaucracy (as measured by education, private sector earnings and skill)and its performance (as measured by the quality of provision of key public services, like education).