Do Public Fund Windfalls Increase Corruption? Evidence from a Natural Disaster

Abstract

We show that unexpected financial windfalls increase corruption in local government. Our analysis uses a unique data set on flood-related transfers, and the associated spending infringements, which the Bulgarian central government distributed to municipalities following torrential rains in 2004 and 2005. We build an index of corruption using information from the publicly available audit reports, and exploit the quasi-random nature of the rainfall shock (conditional on controls for ground flood risk) to isolate exogenous variation in the amount of funds received by each municipality. Our results imply that a 10% increase in the per capita amount of disbursed funds leads to a 9.8% increase in corruption. We also present suggestive evidence that more corrupt mayors anticipated punishment by voters and dropped out of the next election race. Our results highlight the governance pitfalls of non-tax transfers, such as disaster relief or assistance from international organizations, even in moderately strong democracies.

Keywords: corruption, natural disasters, governance

JEL Classification: D73, H71, P26