Fiscal rules, corruption, and electoral accountability

As corruption mostly takes place through the misuse of public spending, it is crucial to understand how policies limiting the spending capacity of local governments may affect corruption. We study the extension of fiscal rules to small Italian municipalities. First, we find a decrease in both corruption charges and corruption charges per euro spent. This effect emerges only in areas in which fiscal rules put a binding cap on municipal capital expenditures. Second, the reduction in corruption is linked to accountability incentives, as it emerges mostly in preelectoral years and for reeligible mayors. Third, we do not find any meaningful impact on local public goods or living standards. Overall, our findings suggest that fiscal rules together with electoral incentives might reduce rent-seeking through lower public spending without depressing local welfare.