Working Paper: NBER ID: w30644
Authors: Silvia Vannutelli
Abstract: A fundamental question in organizational economics is how to structure organizations to better align incentives across levels. While monitoring could mitigate agency problems, it can itself be rendered ineffective if auditors are corruptible. In this paper, I evaluate the consequences of changes in the design of monitoring institutions that limit auditors' conflicts of interest. I exploit the staggered introduction of a reform that removed the control of auditors' appointment 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 improve their net surpluses and debt repayments, per national government objectives. Third, the fiscal improvement results from a sizeable increase in tax capacity. Fourth, treatment effects are a combination of selection, matching, and incentive effects. These findings highlight the value of auditor independence and illustrate how changes in the organizational design of the state can improve governance.
Keywords: auditor independence; municipal fiscal performance; random assignment; monitoring institutions
JEL Codes: D73; H11; H71; H72; H77; H81; H83; M42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| random matching of auditors (C78) | improvement in municipalities' net surpluses (H70) |
| random matching of auditors (C78) | improvement in debt repayments (F34) |
| improvement in municipalities' net surpluses (H70) | increase in tax capacity (H29) |
| increase in tax capacity (H29) | expansion of tax base (H29) |
| random matching of auditors (C78) | alignment of local government behavior with national government objectives (H10) |