Corruption as a Barrier to Entry: Theory and Evidence

25 Pages Posted: 18 Oct 2010

See all articles by Nauro F. Campos

Nauro F. Campos

University College London; University of Michigan at Ann Arbor - The William Davidson Institute; IZA Institute of Labor Economics

Saul Estrin

Centre for Economic Policy Research (CEPR); London School of Economics & Political Science (LSE); IZA Institute of Labor Economics

Eugenio Proto

University of Glasgow; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Abstract

Conventional wisdom depicts corruption as a tax on incumbent firms. This paper challenges this view in two ways. First, by arguing that corruption matters not so much because of the value of the bribe ("tax"), but because of another less studied feature of corruption, namely bribe unavoidability. Second, we argue that the social costs of corruption arise not because corruption hurts incumbent firms, but mostly because it acts as a powerful barrier to the entry of new firms. Corruption sands and greases in tandem: it helps incumbent firms (on balance) and it hurts potential entrants. We put forward a model in which a bureaucrat chooses entry barriers to optimize bribe revenues. When the capacity to collect bribes is high, it is optimal to allow high levels of oligopoly power to incumbents. Conversely, the more avoidable are the bribes, the more firms are allowed into the market. These ideas are tested using a unique, representative sample of Brazilian manufacturing firms. Consistently with our theoretical model, we show that corruption (a) is ranked as the most important barrier to entry (above finance, taxes and regulation) and (b) while bribes' unavoidability is positively related to firm performance, the size of the bribe is not.

Keywords: corruption, barriers to entry, firm performance

JEL Classification: O12, D23, K20, O17, K30

Suggested Citation

Campos, Nauro F. and Estrin, Saul and Estrin, Saul and Proto, Eugenio and Proto, Eugenio, Corruption as a Barrier to Entry: Theory and Evidence. IZA Discussion Paper No. 5243, Available at SSRN: https://ssrn.com/abstract=1693340 or http://dx.doi.org/10.2139/ssrn.1693340

Nauro F. Campos (Contact Author)

University College London ( email )

Gower Street
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University of Michigan at Ann Arbor - The William Davidson Institute

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Ann Arbor, MI 48109-1234
United States

IZA Institute of Labor Economics

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Saul Estrin

Centre for Economic Policy Research (CEPR)

London
United Kingdom

London School of Economics & Political Science (LSE) ( email )

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IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Eugenio Proto

University of Glasgow ( email )

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United Kingdom

HOME PAGE: http://https://sites.google.com/view/eugenioproto-research/home

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

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