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Are corruption and taxation really harmful to growth? Firm level evidence

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  • Fisman, Raymond
  • Svensson, Jakob

Abstract

Exploiting a unique data set containing information about the estimated bribe payments of Ugandan firms, the authors study the relationship between bribe payments, taxes, and firm growth in Uganda for the period 1995-97. Using industry-location averages to circumvent the potential problem of endogeneity, and to deal with issues of measurement error, they find that both the rate of taxation, and the rate of bribery are negatively correlated with firm growth. For the full data set, a one percentage point increase in the bribery rate is associated with three percentage point reduction in firm growth - an effect about three times that of taxation. Moreover, after excluding outliers, the authors find that bribery has a much greater negative impact on growth, and taxation a considerably smaller one. This provides some validation of firm-level theories of corruption, which posit that corruption retards development, even more than taxation does.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 83 (2007)
Issue (Month): 1 (May)
Pages: 63-75

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Handle: RePEc:eee:deveco:v:83:y:2007:i:1:p:63-75

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  1. Jakob Svensson, 2005. "Eight Questions about Corruption," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 19-42, Summer.
  2. Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-81, August.
  3. Joshua Angrist & Alan Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Working Papers 834, Princeton University, Department of Economics, Industrial Relations Section..
  4. Banerjee, Abhijit V, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1289-1332, November.
  5. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
  6. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
  7. Jakob Svensson, 2003. "Who Must Pay Bribes And How Much? Evidence From A Cross Section Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 207-230, February.
  8. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implicationsfor Growth," University of Chicago - George G. Stigler Center for Study of Economy and State 65, Chicago - Center for Study of Economy and State.
  9. Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
  10. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Vito Tanzi, 1998. "Corruption Around the World: Causes, Consequences, Scope, and Cures," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 559-594, December.
  12. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  13. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  14. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
  15. Reinikka, Ritva & Svensson, Jakob, 1999. "Confronting competition - investment response and constraints in Uganda," Policy Research Working Paper Series 2242, The World Bank.
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