Reducing the number of layers (or "flattening") government hierarchies is a popular trend in developing countries, but the value of doing so is unclear. Using a hierarchy reform in China that started in 2003 as an exogenous shock, we investigate whether flattening government hierarchies results in local governments using fiscal funds poorly. We use a unique dataset from audit programs in China and find that the county-level amount of misuses of fiscal funds detected by auditors increases after the government hierarchy is flattened, because the monitoring of county leaders decreases and then th...
