Corruption and Management Practices Firm Level Evidence

We argue that corruption can decrease aggregate productivity by deteriorating firm management practices. We investigate the impact of regional corruption on the management quality of firms within the manufacturing sector in Central and Eastern Europe. To do this we construct a new data set merging a survey of firm management practices and regional measures of corruption from population and firm surveys. The empirical challenge is that bribing practices in the public sector may evolve in response to firm behaviors, and regional corruption is measured with error. To identify causal effects, our preferred specifications use a difference-in-differences instrumental variable methodology. We measure the manufacturing industries’ sensitivity to corruption using their level of dependence to contract institutions. Controlling for regional and manufacturing industry - country fixed effects, we find that firms in more contract dependent industries located in more corrupt regions tend to have lower management quality, more centralized decision-making process and lower level of education of administrative workers. In more corrupt regions, contract dependent firms are also characterized by lower investments in R&D and smaller product markets. Using falsification tests, we show that contract dependent firms do not appear more affected than other firms by business barriers such as transport infrastructure, level of taxes and tax administration, or access to finance. By contrast, contract dependent firms systemically report corruption as a more severe barrier in doing business, and particularly corruption in the judicial system