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Abstract

As part of a recent anti-corruption campaign, the Brazilian government began to audit the municipal expenditure of federally-transferred funds. Using these audit reports, we construct a unique data set of political corruption to test whether reelection incentives affect the level of corruption in a municipality. Consistent with a political economy agency model, we find that mayors who are in their second and final term are significantly more corrupt than first-term mayors. In particular, second-term mayors on average divert, R$188,431.4 more than first-term mayors, which is approximately 4 percent of the total amount transferred to municipalities. We also find much more pronounced effects among municipalities where the costs of rent-extraction are lower, and the density of pivotal voters is higher. Our results also illustrate an important trade-off: second-term mayors, while more corrupt, provide a higher level of public goods. As Brazil and other countries continue their decentralization process, our findings promote the need for a better understanding of how local institutions can help reduce the incentives for corruption.

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