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Corruption and the Efficiency of Capital Investment in Developing Countries

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  • O.Toole, Conor M.
  • Tarp, Finn

Abstract

This paper considers the effect of corruption on the effciency of capital investment. Using firm-level level data from the World Bank enterprise surveys, covering 90 developing and transition economies, we consider whether the cost of informal bribe payments distorts the efficient allocation of capital by reducing the marginal return per unit investment. Using country estimates of fractionalization and legal origin as instruments, and controlling for censoring, we find that bribery decreases investment efficiency, as measured using both absolute and relative metrics of investment returns. The negative effect is strongest for domestic small and medium-sized enterprises while there is no significant effect on foreign and large domestic firms. We conclude that reducing the level and incidence of bribery by public officials would facilitate a more efficient allocation of capital. This in turn would support economic growth and development, particularly for small and medium-sized enterprises.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/wp2012/wp2012-027.pdf
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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number UNU-WIDER Research Paper WP2012/27.

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Length: 46
Date of creation: 2012
Date of revision:
Handle: RePEc:unu:wpaper:wp2012-27

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Keywords: corruption; efficiency; rent-seeking; capital investment;

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References

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  1. Djankov, Simeon & La Porta, Rafael & Shleifer, Andrei & Lopez de Silanes, Florencio, 2001. "The regulation of entry," Policy Research Working Paper Series 2661, The World Bank.
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  13. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
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  15. Reinikka, Ritva & Svensson, Jakob, 2006. "Using Micro-Surveys to Measure and Explain Corruption," World Development, Elsevier, vol. 34(2), pages 359-370, February.
  16. Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
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Cited by:
  1. Andreano, M. Simona & Laureti, Lucio & Postiglione, Paolo, 2013. "Economic growth in MENA countries: Is there convergence of per-capita GDPs?," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 669-683.

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