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Corruption and firms: evidence from randomized audits in brazil

Nov 2017
Working Paper
18-011
By  Emanuele Colonnelli, Mounu Prem
We exploit spatial variation in randomized anti-corruption audits related to government procurement contracts in Brazil to assess how corruption affects resource allocation, firm performance, and the local economy. After an anti-corruption crackdown, regions experience more entrepreneurship, improved access to finance, and higher levels of economic activity. This is inconsistent with corruption acting as “grease in the wheel.” We find that two channels explain these facts: allocation of resources to less efficient firms, and distortions in government dependent firms. Using firms involved in corrupt business with the municipality, i.e. “corrupt firms,” we find that the second channel is more important. Difference in difference estimation suggests that, after audits, the performance of corrupt firms improves relative to a similar set of unaffected firms. Corrupt firms invest more, increase borrowing and leverage, reallocate labor inside the firm, restructure the organizational design by increasing hierarchical layers, rely less on government contracts, and grow faster. Our findings provide novel micro-evidence on why corruption acts as an institutional failure that is detrimental to firm performance and economic growth.