The Real Costs of Washing Away Corruption: Evidence from Brazil’s Lava Jato Investigation

The Real Costs of Washing Away Corruption: Evidence from Brazil’s Lava Jato Investigation

• Author
• Luiz Moura
• Co-authors
• Lars Norden , Ricardo Schechtman , Claudio Ferraz
• Abstract

• Anti-corruption investigations aim at promoting allocative efficiency, growth and innovation, but, if too disruptive, they can generate adverse economic consequences. We examine the costs of one of the world’s largest anti-corruption crackdowns, Operação Lava Jato in Brazil, using unique bank-firm-worker data. We find investigated firms cut employment and wages and lose access to bank credit. Importantly, more exposed banks reduce credit also to non-investigated firms, and even more so for politically connected existing borrowers. We further document negative real and financial effects for non-investigated firms more exposed through their banks. Policy makers should consider these costs when devising anti-corruption investigations.

• Keywords
• Corruption, anti-corruption investigations, credit channel, bank lending, capital and labor allocation
• Subject Area
• Corporate Finance, Intermediation, and Banking

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