Does corruption affect the efficiency of capital investment? An instrumental variables approach for developing countries

Type Journal Article
Title Does corruption affect the efficiency of capital investment? An instrumental variables approach for developing countries
Author(s)
Publication (Day/Month/Year) 2012
Abstract
This paper considers the effect of corruption on the efficiency of capital investment.
Using firm level data from the World Bank enterprise surveys, covering 90 developing and
transition economies, we consider whether the cost of informal bribe payments distorts the
efficient allocation of capital by reducing the marginal return per unit investment. Using
country estimates of fractionalisation and legal origin as instruments, and controlling for
censoring, we find that bribery decreases investment efficiency, as measured using both
absolute and relative metrics of investment returns. The negative effect is strongest for
domestic small and medium sized enterprises while there is no significant effect on foreign
and large domestic firms. This research suggests that reducing the level and incidence
of bribery by public officials would facilitate a more efficient allocation of capital in the
economy. This in turn would support economic growth and development, particularly for
small and medium sized enterprises.

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