Document Type

Working Paper

Publication Date

3-30-2015

College/Unit

Chambers College of Business and Economics

Document Number

15-05

Department/Program/Center

Economics

Abstract

In this paper, we examine the effect of corruption on business activity in Brazilian municipalities. Previous research that has examined the impact of corruption has relied primarily on survey or conviction data, which may be problematic as these measures likely to be biased. We use a new measure of corruption that draws upon random audit data of municipal governments’ finances in Brazil. We find that higher levels of corruption cause reductions in the number of businesses operating in an area. Furthermore, we find that these effects become larger over time, suggesting that corruption is more detrimental to long-run economic activity. However, we find that if institutional quality is poor, then higher levels of corruption result in more businesses locating in a jurisdiction. This supports the argument that if there are poor institutions operating in an area, corruption can “grease the wheels” and is an alternative mechanism to help new businesses in the area.

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