The Externalities of Corruption: Evidence from Entrepreneurial Firms in China
73 Pages Posted: 13 Jan 2017 Last revised: 15 Mar 2019
Date Written: February 28, 2019
Exploiting China’s anti-corruption campaign as an exogenous shock to corruption, we show that following a decrease in the effectiveness of corruption, the performance of firms operating in ex ante more corrupt environments improves. Small firms benefit more. We identify the channels through which corruption hampers firm performance. Following the anti-corruption campaign, the allocation of capital and labor becomes more efficient. Firms operating in ex ante more corrupt environments experience larger productivity gains, easier access to debt financing, and higher growth of sales than other firms. Overall, our results suggest that corruption creates negative externalities.
Keywords: Corruption, corporate governance, capital and labor allocation, China
JEL Classification: D22, D62, G30, L20, O12, P26
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