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

Anti-corruption investigations aim at promoting allocative efficiency and growth, 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 total real and financial effects for non-investigated firms more exposed through their banks. Policy makers should consider these costs when devising anti-corruption investigations.