This paper examines whether Brazil’s anti-corruption program, which audits municipalities for their use of federal funds, reduces corruption among local governments. To estimate this
effect, we exploit the fact that some municipalities are audited multiple times and at random. We find that being audited in the past reduces future corruption by 7 percent. We interpret
these reduced-form findings in the context of a political agency model, which we proceed to structurally estimate. Based on our estimated model, we then decompose the effects of the
audits along three potential channels: 1) a political selection effect, 2) an electoral disciplining effect, and 3) a non-electoral disciplining effect. We find that the audits increased the perceived
threat of the non-electoral costs of engaging in corruption, and that this channel accounts for 2/3rd of the reduction in corruption. The disciplining effect coming from elections explains the
remaining reduction in corruption. We find no evidence of a political selection effect.