Natural Disasters and Local Governments' Fiscal Misconduct: Evidence From Five Earthquakes in China

ABSTRACT Preventing fiscal misconduct associated with disaster‐aid related windfall revenue poses significant challenges for governments due to the unpredictable and often temporary nature of such income streams. This study examines how natural disasters affect fiscal misconduct among local governments by using five major earthquakes in recent China. Utilizing county‐level data compiled from five destructive earthquakes from 2012 to 2018 and a Difference in Differences (DID) design, our findings demonstrate a significant surge in fiscal misconduct, namely unpaid fiscal funds and miscalculated funds, following the earthquakes. We explore two underlying mechanisms, which are an increased amount of post‐disaster transfer payments and auditing intensity. Finally, our heterogeneity analysis highlights that how audit independence may detect more local governments' fiscal misconduct. This research aims to explain why local governments act opportunistically after natural disasters and offer practical implications for those who seek to increase the efficiency of local governance and oversight mechanisms for local governments.