Corruption Environment and Investment in Private Firms

Using a panel data set of 148,286 firm-year observations related to 41,497 privately owned firms in thirteen European countries between 2001 to 2013, we provide the first large-scale study of the effect of uncertainty about corruption (need to make unofficial payments to public officials) on corporate investments. With a dataset of manager interviews and a dataset of firms’ financial and accounting statements, we find that higher corruption uncertainty is associated with lower corporate investments in medium-size and large domestically-owned firms, but not in foreign-owned firms or very small domestic firms. The level of corruption has no effect on investment when corruption uncertainty is included in estimation, a finding that contradicts earlier corruption studies that did not include corruption uncertainty. Our results hold in fixed effects, instrumental variable, and matching analyses. They are robust to model specifications and suggest that policy should aim at reducing corruption uncertainty (e.g., by having all permits issued by one office).