Distortion by Audit: Evidence from Public Procurement

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.