DP15891 Corruption under Austerity
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.