Distortion by Audit: Evidence from Public Procurement

66 Pages Posted: 30 Oct 2017

See all articles by Maria Paula Gerardino

Maria Paula Gerardino

Universitat Pompeu Fabra

Stephan Litschig

National Graduate Institute for Policy Studies (GRIPS)

Dina Pomeranz

Harvard University - Business School (HBS)

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Date Written: October 2017

Abstract

Public sector audits are a key element of state capacity. However, we find that they can create unintended distortions. Regression discontinuity analysis from Chile shows that audits lowered the use of competitive auctions for public procurement, reduced supplier competition, and increased the likelihood of incumbent, small, and local firms winning contracts. We also find suggestive evidence of a price increase. Looking inside the black box of the audit process reveals that relative to comparable direct contracts, auctions underwent more than twice as many checks and led to twice as many detected infractions. These findings show that standard audit protocols can mechanically discourage the use of more regulated, complex and transparent procedures that involve more auditable steps.

Suggested Citation

Gerardino, Maria Paula and Litschig, Stephan and Pomeranz, Dina, Distortion by Audit: Evidence from Public Procurement (October 2017). NBER Working Paper No. w23978, Available at SSRN: https://ssrn.com/abstract=3061659

Maria Paula Gerardino (Contact Author)

Universitat Pompeu Fabra

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Stephan Litschig

National Graduate Institute for Policy Studies (GRIPS) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan

Dina Pomeranz

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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