Windfall Federal Grants and Local Government Corruption

Abstract

While federal grants comprise a significant and increasing revenue source for many local governments, regulators have expressed concerns about the effectiveness of the federal government’s grant management systems. This study investigates and finds that windfall increases in federal grants lead to significantly more public corruption charges. We then explore whether audit monitoring and press transparency mechanisms help ameliorate that relationship. We find that municipalities’ poor quality internal controls exacerbate the effect of windfalls on corruption, but such effect is attenuated when there are increases in the presence of state fraud auditors. As for press transparency, we find that a greater number of newspaper employees and reporters weaken the relationship. Overall, our study contributes the extant literature by exploring accounting-related aspects of local government political corruption.