Timothée Demont: timothee.demont[at]univ-amu.fr
Lorenzo Rotunno: lorenzo.rotunno[at]univ-amu.fr
We develop a political agency model in which office holders are motivated by re-election as well as reputation motives, and are incentivized to curb corrupt behavior through elections, formal audits, as well as norms regarding the appropriateness of corruption that prevail in their peer group. The model formalizes the notion that anti-social behavior is governed by both formal and informal rules of conduct. We show that, while the formal institutions of audits and elections have the desired direct effect of reducing corruption, the presence of norms and their interaction with the direct incentives can have unintended effects. We examine the model's predictions in the context of Puerto Rico's anti-corruption municipal audits program over the period 1987-2014. Specifically, using a quasi-experimental design based on the exogenous timing of audits relative to elections, we show that the model helps explain peculiar patters in the data: mayors respond positively to audits in their own community, but negatively to audits - and the corresponding reduction in corruption - in neighboring municipalities. Our estimates suggest a large negative spillover effect: communities where two-thirds of adjacent jurisdictions undergo a (timely) audit experience a 30 percent increase in reported corruption levels.