Do Public Fund Windfalls Increase Corruption? Evidence from a Natural Disaster Elena Nikolovaa Nikolay Marinovb 68131 Mannheim A5-6, Germany October 5, 2016 Abstract We show that unexpected financial windfalls increase corruption in local govern- ment. Our analysis uses a new data set on flood-related transfers, and the associated spending infringements, which the Bulgarian central government distributed to mu- nicipalities following torrential rains in 2004 and 2005. Using information from the publicly available audit reports we are able to build a unique objective index of cor- ruption. We exploit the quasi-random nature of the rainfall shock (conditional on controls for ground flood risk) to isolate exogenous variation in the amount of funds received by each municipality. Our results imply that a 10 % increase in the per capita amount of disbursed funds leads to a 9.8% increase in corruption. We also present suggestive evidence that more corrupt mayors anticipated punishment by voters and dropped out of the next election race. Our results highlight the governance pitfalls of non-tax transfers, such as disaster relief or assistance from international organizations, even in moderately strong democracies. Keywords: corruption, natural disasters, governance JEL codes: D73, H71, P26 aResearch Fellow, Central European Labour Studies Institute, Slovakia and associated researcher, IOS Regensburg, Germany. Email:
[email protected]. We would like to thank Erik Bergl¨of,Rikhil Bhav- nani, Simeon Djankov, Sergei Guriev, Stephan Litschig, Ivan Penkov, Grigore Pop-Eleches, Sandra Sequeira and conference participants at the 2015 Annual Meeting of the European Public Choice Society, Groningen, the 2015 American Political Science Association, San Francisco and seminar participants at Brunel, King's College workshop on corruption, and LSE for useful comments, and Erik Bergl¨ofand Stefka Slavova for help with obtaining Bulgarian rainfall data.