Does local political corruption asymmetrically affect resource adjustment decisions?

Local political corruption can distort resource allocation decisions either by increasing the risk of wealth expropriation or through local contagious norms, thereby acting as a force that restrains downward adjustments when demand decreases more than upward adjustments when demand increases. Consistent with this idea, we document that firms headquartered in more corrupt U.S. states exhibit stronger asymmetric cost responses to activity changes. Evidence from two quasi-natural experiments supports a causal interpretation of this link. The impact of corruption on cost asymmetry intensifies when there is a higher likelihood of political interference, firms sacrifice financial and operating flexibility to deter expropriation, and private corruption exists alongside public corruption. Conversely, it weakens for firms with high standards of cultural integrity and stringent monitoring. Finally, we show that corruption-induced cost asymmetry has adverse valuation implications and that our main findings, while identified in the U.S. setting, also find suggestive support in an international context. Overall, our study suggests that political corruption represents an asymmetric friction in resource allocation decisions, leading to a potentially excessive degree of asymmetric cost behavior.