Corruption and management practices: Firm level evidence

We argue that corruption can decrease aggregate productivity by deteriorating firm management practices. We investigate the impact of regional corruption on the management quality of firms within the manufacturing sector in Central and Eastern Europe. The empirical challenge is that bureaucrats’ bribing practices may evolve in response to firm behaviors, and that regional corruption is measured with error. To identify causal effects, our preferred specifications use a difference-in-differences methodology. We measure the manufacturing industries’ exposure to corruption using their level of dependence to contract institutions. Controlling for regional and manufacturing industry – country fixed effects, we find that firms in more contract dependent industries, located in more corrupt regions, tend to have lower management quality, a more centralized decision-making process, and a lower level of education among administrative staff. In more corrupt regions, contract dependent firms are also characterized by lower investment in R&D, and smaller product markets. We show that our findings are not likely to be driven by omitted variables, outliers, or reverse causality.