State Paralysis: The Effect of Compliance Uncertainty on Government Effectiveness

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, which organizes large conferences with municipal health heads responsible for managing, on average, a USD 1 million health budget. We first present three descriptive facts of the context consistent with the importance of compliance uncertainty for aggregate public spending. First, 20% of municipalities have experienced substantial incomplete spending for more than 10 years. Second, around one-fourth of the mayors are convicted with large penalties, even when there is no incidence of corruption. Lastly, regulation complexity is associated with incomplete spending (in the administrative data and a policymakers' perception in a survey). We then establish the causal link between compliance uncertainty and the spending decision, in a low-stakes lab-in-the-field experiment at CONASEMS conferences. We offer management support to implement a valuable public policy, namely a children's kit to reward parents who complete the vaccination scheme. We vary whether the children's kit includes "toys’’ (vs. "hygiene’’) items to be purchased with health earmarked funds. Preliminary evidence from the pilot shows that the toys policy bundle is perceived to be equally effective, but has a 20% reduced willingness to pay. Consistent with a risk-effectiveness trade-off, the toys policy bundle is perceived to have a higher risk.