DP15891 Corruption under Austerity

Author(s): Gianmarco Daniele, Tommaso Giommoni
Publication Date: March 2021
Keyword(s): austerity, Corruption, European funds, fiscal rules, local public finance, public procurement
JEL(s): D72, D73, H62, H72, K34
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15891

We study how policies limiting the spending capacity of local governments may reduce corruption. We exploit the extension of one such policy, the Domestic Stability Pact (DSP), to small Italian municipalities. The DSP led to a decrease in both recorded corruption rates and corruption charges per euro spent. This effect emerges only in areas in which the DSP put a binding cap on municipal capital expenditures. The reduction in corruption is linked to accountability incentives as it emerges mostly in pre-electoral years and for re-eligible mayors. We then estimate the impact of the extension of the DSP on local public good provision in the following years, finding a null effect in the short run. Overall, our findings suggest that budget constraints might induce local governments to curb expenditures in a way that dampens their exposure to corruption without depressing local welfare.