The size of the informal sector in Brazil is extremely large. Both employment and incomes from the informal sector are in- cluded in each decennial Census, making this an ideal country for this specific type of analysis. In the sample of municipalities used in this paper, the size of the Brazilian informal sector in 20 0 0, as measured by share of employees without a formal con- tract, was over 50% of total employees. Furthermore, informal sector employees accounted for almost 40% of total income from employees of all types in these municipalities. Thus, it is clear that the informal sector is an integral part of the Brazilian economy. In addition, corruption in Brazil has long been a serious problem. Due to a number of scandals exposing specific politician’s behavior in the latter half of the 20th century, Brazil is recognized as a country that is suffering from corrupt acts ( Geddes & Neto, 1992 ; da Silva, 1999 ). In order to combat corruption, in May of 2003, the government of Luiz Inácio Lula da Silva implemented a program based on random auditing of municipal governments’ expenditures ( Ferraz & Finan, 2008; Ferraz & Finan, 2011 ). This program randomly selects about one percent of the total number of municipalities with a population less than 50 0,0 0 0 (Controladoria-Geral da União (CGU)). The CGU auditors collect information on all federal funds transferred to the municipal government, inspects public work construction, and consults the population through community councils on any complaints of misconduct (CGU). This collected information is then organized into a report and made available to the public. In a series of papers, Claudio Ferraz and Frederico Finan used these reports to construct measures of corruption in the audited municipalities (2008; 2011). This paper uses the corruption indicators developed in their 2011 paper, specifically. Ferraz and Finan (2011) focus on three different types of corruption that could be found in these audit reports: fraud in the public procurement of goods and services, diversion of funds, and the over invoicing of goods and services. They estimate that corruption in these local governments alone amounts to be about $550 million per year. The main corruption variable of interest in this paper is the s