Internal Control as State Capacity

Abstract

While previous research has examined the effects of horizontal accountability institutions such as courts or external audits, we know much less about the origins and consequences of internal control institutions in the public sector. I argue that internal control systems are an under-appreciated source of state effectiveness, because they enhance governments' ability to constrain malfeasance, improve compliance with rules, and monitor performance. I present a series of findings on Brazilian municipalities' internal control systems, leveraging administrative data and quasi-experimental designs. First, I use cross-sectional data to document that there remains significant variation in the resources, mandates, and actions of internal control systems. Second, I use panel data and a causal event study design to show that legal reforms of internal control systems lead to an increase in hires of internal controllers. Third, I show these legal reforms have downstream consequences in the control of patronage, leading to a reduction in the size of the municipal workforce, and a higher incidence of civil service contracts. Fourth, to address questions about the origins of internal controls systems, I show that randomized federal anti-corruption audits lead to improved internal controls systems only when they uncover medium levels of corruption. Together, these findings highlight the consequential political economy of internal control systems, particularly for local governments.

Guillermo Toral

Assistant Professor of Political Science