The relationship between amendments to the federal budget Law and municipal corruption in Brazil: evidence from reports of the brazilian Internal Audit Agency

Previous studies on corruption (Elliott, 2002; Klitgaard, 1988; Rose-Ackerman, 2002) present the relationship between amendments and municipal corruption. Four nonexclusive explanations for the correlation are discussed: (i) the growing potential gains of corruption; (ii) the number of transactions under the control of the local government; (iii) the pressure from groups of private rent-seekers and; (iv) revenue transfers might be the result of collusion between local governments and federal congressmen. Using data from the Controladoria-Geral da União (Brazilian Internal Audit Agency) Anticorruption Program based on the random auditing of municipal government's expenditures, we study the relationship between amendments to the Brazilian Federal Budget Law and municipal corruption. On average, after controlling for a series of socio-economic and political variables, cities granted with revenue transfers derived from amendments have corruption rates that are 25% higher than the rest of the sample. Although our empirical results indicate that the increase in corruption occurs when the municipalities receive extraordinary revenue transfers, corruption seems to be insensitive to the amount of resources transferred. Such findings give more support to explanations (iii) and (iv).