Corruption and innovation in China

Abstract

In this paper, I study the effects of corruption on firm innovation, using a data set that covers the registration and patent application records of the universe of firms in China. I provide empirical evidence that corruption significantly deters innovation. Such effects are stronger for officials with higher ability, but can be limited by imposing promotion incentives to the officials in charge. I build and estimate a stylized quantitative firm-dynamics model, in which firms bribe the corrupt officials in exchange for a lower entry cost and more protection. Simulation suggests that corruption reduces welfare by 11.3%.

Keywords: corruption, innovation, firm dynamics, welfare, China

JEL Classification: C15, D21, D22, D50, D60, D72, D73