Distortion by Audit: Evidence from Public Procurement

Out­line

Au­dit­ing process­es are in­tend­ed to sim­ply mon­i­tor com­pli­ance with ex­ist­ing rules. How­ev­er, they may by them­selves some­times cre­ate un­in­tend­ed im­pacts and in­cen­tives through the spe­cif­ic pro­to­col by which au­dits are ex­e­cut­ed. This pa­per in­ves­ti­gates the ef­fects of 2011 and 2012 au­dits in Chile on pub­lic en­ti­ties’ sub­se­quent pub­lic pro­cure­ment prac­tices. While the na­tion­al pro­cure­ment leg­is­la­tion tries to pro­mote the use of more trans­par­ent and com­pet­i­tive auc­tions rather than the more dis­cre­tionary di­rect con­tracts for se­lec­tion of pub­lic pro­cure­ment sup­pli­ers, the au­dit pro­to­col of the na­tion­al comp­trol­ler agency me­chan­i­cal­ly leads to more scruti­ny and a high­er prob­a­bil­i­ty of fur­ther in­ves­ti­ga­tion for auc­tions than for di­rect con­tracts. This can cre­ate a dis­in­cen­tive for the use of auc­tions.

Con­tra­dic­to­ry in­cen­tives

Us­ing a re­gres­sion dis­con­ti­nu­ity de­sign based on a scor­ing rule of the na­tion­al au­dit­ing agency, we find that in­deed be­ing au­dit­ed leads pub­lic en­ti­ties to de­crease their use of auc­tions and in­crease the use of di­rect con­tracts cor­re­spond­ing­ly. In or­der to fur­ther test the un­der­ly­ing mech­a­nism, we de­vel­op a new econo­met­ric ap­proach to con­duct sub­group analy­sis in re­gres­sion dis­con­ti­nu­ity de­signs while hold­ing oth­er ob­serv­ables con­stant.

Re­search Team

Author

Dina Pomeranz

Assistant Professor of Microeconomics, endowed by the UBS Center

Zurich ZCED

Maria Paula Ger­ardi­no

In­ter-Amer­i­can De­vel­op­ment Bank

Stephan Litschig

Na­tion­al Grad­u­ate In­sti­tute for Pol­i­cy Stud­ies