Corruption and the Effects of Economic Freedom

The predictions that economic freedom is beneficial in reducing corruption have not been found to be universally robust in empirical studies. The present work reviews this relationship by using firms’ data in a cross-country survey and argues that approaches using aggregated data have not been able to explain it appropriately. Our purpose is, first to model cross-country variations of the micro-founded economic freedom-corruption relationship using multilevel models. Additionally, we analyze this relationship by disentangling the determinants for several components of economic freedom because not all areas affect corruption equally. The results show that the extent of the macro-effects on the measures of (micro)economic freedom for corruption, identified by the degree of economic and institutional development of a country, can explain why a lack of competition policies and government regulations may yield more corruption. Our conjectures are confirmed by estimations for Africa and transition economy subsamples