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SME performance in transition economies: The financial regulation and firm-level corruption nexus

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  • Wieneke, Axel
  • Gries, Thomas

Abstract

Using a general equilibrium endogenous growth model we explain underperformance in the small and medium enterprise sector as an effect of corruption and non-competitive banking. Limited competition in the banking sector causes a high loan-deposit spread, worsens the initial effect of corruption, and depresses growth. Fostering bank competition, for instance, by allowing foreign bank entry, would be a simple solution to this problem, but frequently, authorities choose to hamper bank competition. Therefore, we explain the persistence of non-competitive banking as a result of governments' regulatory choice. If the government has a stake in the banking sector there exists a trade-off between current benefits from bank profits and future growth. Firm-level corruption affects intertemporal optimization and distorts the government's choice towards more restrictive regulation, i.e., less bank competition, even if the deciding institution itself is not corrupt. These results show that the two prominent problems for small and medium enterprises, corruption and finance, are mutually reinforcing.

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Bibliographic Info

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

Volume (Year): 39 (2011)
Issue (Month): 2 (June)
Pages: 221-229

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Handle: RePEc:eee:jcecon:v:39:y:2011:i:2:p:221-229

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Web page: http://www.elsevier.com/locate/inca/622864

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Keywords: Small and medium enterprises Endogenous growth Financial intermediation Corruption Transition economies;

References

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Cited by:
  1. Cosmin Marinescu & Octavian-Dragomir Jora, 2013. "Assessment on the “institutional economics” of corruption. Business and development in Romania, between formal and informal practices," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, Academy of Economic Studies - Bucharest, Romania, vol. 15(Special 7), pages 603-616, November.
  2. Cosmin Marinescu, 2013. "Institutional Quality of the Business Environment: Some European Practices in a Comparative Analysis," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, Academy of Economic Studies - Bucharest, Romania, vol. 15(33), pages 270-287, February.
  3. Dana PANCUROVA & Stefan LYOCSA, 2013. "Determinants of Commercial Banks’ Efficiency: Evidence from 11 CEE Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 63(2), pages 152-179, May.

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