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Corruption as a Barrier to Entry: Theory and Evidence

  • Campos, Nauro F


    (Brunel University)

  • Estrin, Saul


    (London School of Economics)

  • Proto, Eugenio


    (University of Warwick)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5243.

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Length: 25 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5243
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  1. Pierre-Guillaume Méon & Khalid Sekkat, 2005. "Does corruption grease or sand the wheels of growth?," ULB Institutional Repository 2013/7364, ULB -- Universite Libre de Bruxelles.
  2. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, vol. 92(5), pages 1335-1356, December.
  3. Toke S. Aidt, 2009. "Corruption, institutions, and economic development," Oxford Review of Economic Policy, Oxford University Press, vol. 25(2), pages 271-291, Summer.
  4. Acemoglu, Daron & Verdier, Thierry, 1996. "Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach," CEPR Discussion Papers 1494, C.E.P.R. Discussion Papers.
  5. Toke S. Aidt & Jayasri Dutta, 2008. "Policy Compromises: Corruption And Regulation In A Democracy," Economics and Politics, Wiley Blackwell, vol. 20(3), pages 335-360, November.
  6. Aterido, Reyes & Hallward-Driemeier, Mary & Pagés, Carmen, 2007. "Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms," IZA Discussion Papers 3138, Institute for the Study of Labor (IZA).
  7. Razafindrakoto, Mireille & Roubaud, François, 2010. "Are International Databases on Corruption Reliable? A Comparison of Expert Opinion Surveys and Household Surveys in Sub-Saharan Africa," World Development, Elsevier, vol. 38(8), pages 1057-1069, August.
  8. Benjamin A. Olken & Patrick Barron, 2007. "The Simple Economics of Extortion: Evidence from Trucking in Aceh," NBER Working Papers 13145, National Bureau of Economic Research, Inc.
  9. Mookherjee, Dilip & Png, I P L, 1995. "Corruptible Law Enforcers: How Should They Be Compensated?," Economic Journal, Royal Economic Society, vol. 105(428), pages 145-59, January.
  10. Fisman, Raymond & Svensson, Jakob, 2007. "Are corruption and taxation really harmful to growth? Firm level evidence," Journal of Development Economics, Elsevier, vol. 83(1), pages 63-75, May.
  11. Besley, Timothy & McLaren, John, 1993. "Taxes and Bribery: The Role of Wage Incentives," Economic Journal, Royal Economic Society, vol. 103(416), pages 119-41, January.
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  13. Razafindrakoto, Mireille & Roubaud, François, 2010. "Are international databases on corruption reliable? A comparison of expert opinion surveys and household surveys in sub-Saharan Africa," Economics Papers from University Paris Dauphine 123456789/4352, Paris Dauphine University.
  14. Banerjee, Abhijit V, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1289-1332, November.
  15. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
  17. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
  18. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
  19. Toke S. Aidt, 2003. "Economic analysis of corruption: a survey," Economic Journal, Royal Economic Society, vol. 113(491), pages F632-F652, November.
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