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Corruption as a Barrier to Entry: Theory and Evidence

Author

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  • Campos, Nauro F
  • Estrin, Saul
  • Proto, Eugenio

Abstract

Conventional wisdom depicts corruption as a tax on incumbent firms. This paper challenges this view in two ways. First, by arguing that corruption matters not so much because of the value of the bribe ("tax"), but because of another less studied feature of corruption, namely bribe unavoidability. Second, we argue that the social costs of corruption arise not because corruption hurts incumbent firms, but mostly because it acts as a powerful barrier to the entry of new firms. Corruption sands and greases in tandem: it helps incumbent firms (on balance) and it hurts potential entrants. We put forward a model in which a bureaucrat chooses entry barriers to optimize bribe revenues. When the capacity to collect bribes is high, it is optimal to allow high levels of oligopoly power to incumbents. Conversely, the more avoidable are the bribes, the more firms are allowed into the market. These ideas are tested using a unique, representative sample of Brazilian manufacturing firms. Consistently with our theoretical model, we show that corruption (a) is ranked as the most important barrier to entry (above finance, taxes and regulation) and (b) while bribes unavoidability is positively related to firm performance, the size of the bribe is not.

Suggested Citation

  • Campos, Nauro F & Estrin, Saul & Proto, Eugenio, 2010. "Corruption as a Barrier to Entry: Theory and Evidence," CEPR Discussion Papers 8061, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8061
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. David N Margolis, 2014. "By Choice and by Necessity: Entrepreneurship and Self-Employment in the Developing World," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 26(4), pages 419-436, September.
    2. Jamie Bologna & Amanda Ross, 2015. "Corruption and entrepreneurship: evidence from Brazilian municipalities," Public Choice, Springer, vol. 165(1), pages 59-77, October.
    3. Jamie Bologna & Amanda Ross, 2015. "Corruption and Entrepreneurship: Evidence from a Random Audit Program," Working Papers 15-05, Department of Economics, West Virginia University.
    4. Couttenier, Mathieu & Toubal, Farid, 2017. "Corruption for sales," Journal of Comparative Economics, Elsevier, vol. 45(1), pages 56-66.
    5. Barassi, Marco R. & Zhou, Ying, 2012. "The effect of corruption on FDI: A parametric and non-parametric analysis," European Journal of Political Economy, Elsevier, vol. 28(3), pages 302-312.
    6. Golovanova, Svetlana V. & Meleshkina, Anna I., 2016. "Estimation of Interrelation between Corruption and Competition," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 100-121, December.
    7. Johann Graf Lambsdorff, 2013. "Corrupt intermediaries in international business transactions: between make, buy and reform," European Journal of Law and Economics, Springer, vol. 35(3), pages 349-366, June.
    8. Alexeev, Michael & Song, Yunah, 2013. "Corruption and product market competition: An empirical investigation," Journal of Development Economics, Elsevier, vol. 103(C), pages 154-166.
    9. Tanja Kosi & Štefan Bojnec, 2013. "Institutional barriers to business entry in advanced economies," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(2), pages 317-329, April.
    10. Pavlova, Natalia & Meleshkina, Anna, 2017. "Anti-Corruption and Protection of Competition," Working Papers 041707, Russian Presidential Academy of National Economy and Public Administration.

    More about this item

    Keywords

    barriers to entry; corruption; firm performance;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • K20 - Law and Economics - - Regulation and Business Law - - - General

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