Tuesday, November 9, 2010

Corruption as a barrier to entry

by Nauro F. Campos, Saul Estrin and Eugenio Proto

November 8, 2010

Conventional wisdom says that corruption hurts the economy because it taxes investment and weakens public services. This column presents evidence from interviews with CEOs in Brazil. It argues that corruption acts as a barrier to entry, with potential entrants put off by the uncertainty over what bribes to pay and when to pay them.

Corruption is often viewed as having a negative effect on economic performance. Mauro (1995) considers it as a tax on investment while Goulder, Parry and Burtraw (1997) suggest bribes may reduce public service provision because they substitute for taxation.

While some argue that corruption can “grease the wheels of growth” by addressing inefficiencies created by government intervention (Méon and Sekkat 2005), the econometric evidence supporting a negative effect is overwhelming (see Bardham, 1997, and Pande, 2008, for authoritative surveys). Despite this body of evidence, the exact mechanisms through which the harmful effect of corruption operates onto enterprise and national economic performance are still not fully understood. This column summarises recent research presenting a different mechanism and econometric evidence of its importance.


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