Government Audits (WP-23-09)
Martina Cuneo, Jetson Leder-Luis, and Silvia VannutelliAudits are a common mechanism used by governments to monitor public spending. In this paper, the researchers discuss the effectiveness of auditing with theory and empirics. In their model, the value of audits depends on both the underlying presence of abuse and the government’s ability to observe it and enforce punishments, making auditing most effective in middling state-capacity environments. Consistent with this theory, they survey all the existing credibly causal studies and show that government audits seem to have positive effects mostly in middle-state-capacity environments like Brazil. The authors present new empirical evidence from American city governments, a high-capacity and low-impropriety environment. Using a previously unexplored threshold in federal audit rules and a dynamic regression discontinuity framework, they estimate the effects of these audits on American city finance and find no marginal effect of audits.