From Lapdogs to Watchdogs: Random Auditor Assignment and Municipal Fiscal Performance

Silvia Vannutelli

No 30644, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A central challenge in public finance is how to design oversight institutions that align local governments’ incentives with national fiscal objectives. While monitoring can mitigate agency problems, it may itself be rendered ineffective if monitors are corruptible. In this paper, I evaluate the consequences of changes in the design of monitoring institutions for organizational performance. I exploit the staggered introduction of a reform that removed the control of municipal auditors’ appointments from local politicians and introduced a random assignment mechanism. I obtain four main findings. First, random matching severs auditors-mayors connections. Second, treated municipalities significantly and persistently improve their net surpluses and debt repayments, in line with national government objectives. Third, the fiscal improvement results from a sizeable increase in tax capacity. Fourth, treatment effects are significantly larger where the risk of auditor capture was highest before the reform, but also increasing in auditors’ expertise—suggesting the potential presence of a bias-information trade-off. Overall, the results highlight the value of monitors’ independence and illustrate how changes in organizational design can substantially improve governance.

JEL-codes: D73 H11 H71 H72 H77 H81 H83 M42 (search for similar items in EconPapers)
Date: 2022-11
New Economics Papers: this item is included in nep-acc and nep-ure
Note: CF DEV LE PE POL
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Citations: View citations in EconPapers (14)

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