Corruption and Firms

We estimate the causal real economic effects of a randomized anticorruption crackdown on local governments in Brazil over the period 2003-2014 using rich micro-data on corruption and firms. After anti-corruption audits, municipalities experience an increase in economic activity concentrated in sectors most dependent on government relationships. The presence of geographic spillovers and additional tests show these effects are driven by a disciplining rather than a selection channel within local governments. Back-of-the-envelope estimates indicate that audits generate large local multipliers. Using multiple administrative firm level datasets and face-to-face firm surveys, we argue that corruption mostly acts as a tax on the local economy by generating additional costs and distortions on government-dependent firms. The political misallocation of resources across firms plays a seemingly secondary role, indicating that at the local level most rents are captured by politicians and public officials rather than firms