Fighting Corruption with Fiscal Rules

• In Event: Clientelism and Corruption

Abstract

This paper studies the effects of fiscal rules on corruption. We test whether the introduction of a policy that limits deficit accumulation (the Domestic Stability Pact) may discipline local governments, leading to a reduction in corruption, as measured by original data on official criminal complaints. We study Italian cities which are subject to these rules, focusing on the extension of this policy to cities below 5,000 inhabitants. Using a Difference-in-Discontinuity design and a (local) Difference-in-Differences, we find a response to a strengthening of fiscal rules. We find a substantial decrease in corruption complaints, which is linked to a reduction in public investments and procurement expenditures. The effects are stronger in cities in which the Domestic Stability Pact is more binding, i.e. when it requires higher levels of budgetary surplus. These findings suggest fiscal rules lead local governments to efficiently curb expenditure, and in turn corruption.

Author

• Gianmarco Daniele