Distortion by Audit: Evidence from Public Procurement

Public sector audits are key to state capacity. However, they can create unintended distortions. Regression discontinuity analysis from Chile shows that audits lowered the use of auctions for public procurement, reduced supplier competition, and increased the likelihood of small, local, and incumbent firms winning contracts. 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 involving more auditable steps. (JEL H57, H83, O17)