Caught with the Hand in the Cookie Jar : Firm Growth and Labor Reallocation after Exposure of Corrupt Practices

Corrupt practices in the assignment of government contracts are largely diffused and can generate misallocation of resources across firms. We study how disclosure of such practices affects firm growth and labor reallocation. We exploit exogenous variation in the exposure of illegally favored firms using random municipality audits by a large anti-corruption government program in Brazil. Firms exposed by the auditing program experience a decline in employment growth relative to their peers. We document that young, less-educated workers that do not occupy a managerial position have higher probability to leave the exposed firms. Released workers tend to reallocate to firms not found to be illegally favored. Within-sector firm size dispersion decreases in audited municipalities with respect to non-audited ones. Our evidence suggests that random auditing programs can reduce labor misallocation across firms