The Externalities of Corruption: Evidence from Entrepreneurial Firms in China
64 Pages Posted: 13 Jan 2017 Last revised: 18 Jul 2019
Date Written: July 18, 2019
Exploiting China’s anti-corruption campaign, 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. Taken together, 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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