Abstract
High agricultural profits motivate politicians to collude with local elites and ignore illegal conversion of natural forests. Fighting corruption through fiscal audits can improve local governance in general but may also unintentionally intensify such collusion and rent extraction activities within the less scrutinized forestry sector. This paper highlights such unintended consequences of a federal anti-corruption strategy in Brazil by documenting the causal effects of randomized fiscal audits on deforestation dynamics, a non-targeted outcome. Between 2003 and 2011, public audits of federal funds increased deforestation by about 10% in municipalities of the Brazilian Amazon within the first three years after the audit. The audits triggered forest loss, especially during election years, in municipalities governed by first-term mayors who managed to win re-elections afterward, and in places with a high share of cattle ranching, indicating potential collusion between local politicians and the agricultural sector.
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