Diana Moreira, UC Davis

State Paralysis:  The Effect of Compliance Uncertainty on Government Effectiveness

with Gustavo Fernandes, Daniel Faleiros, Socorro P. Martinez, Joana Naritomi, Blenda Pereira

Regulation and enforcement around the use of public funds can reduce corruption, but does it also alter incentives to spend? In this paper we investigate whether compliance uncertainty around spending rules can stifle valuable-to-the-public spending and distort policy choice. We leverage administrative data and a collaboration with the Brazilian Council of Municipal Health Secretaries (CONASEMS) that organizes large conferences with municipal health secretaries responsible for managing on average an $1 million USD health budget. We first establish the causal link between compliance uncertainty and the intensive margin search for safety response, in a controlled lab-in-the-field experiment. We offer a spending plan on a valuable-to-the-public policy, namely a children-kit to reward parents that complete the vaccination scheme. We vary whether the children-kit includes ``toys and books’’ (vs. ``oral hygiene’’) items to be purchased with health earmarked funds. We show that the toys-and-books policy bundle is perceived to be equally effective, but has a 20% reduced WTP. Consistent with a risk-effectiveness tradeoff, toys-and-books policy bundle is perceived to have higher risk. We then use descriptive and quasi-experimental variation to study consequences of compliance uncertainty for the real aggregate public spending allocation, in particular relating it to a common phenomenon of limited spending of available revenues in local governments.