Fraud and Innovation: Is There a Cheater's Discount?

Fraudsters seem to possess many of the traits that are associated with innovators: they disrespect the established ways of doing things; they think outside the box to create their own ways of obtaining what they want; and in the process, they embrace the risks of failure and of social sanctions. Nonetheless, there are also good reasons to expect fraudulent firms to be less innovative than their nonfraudulent peers, as cheating buffers firms from external pressures and thus fosters managerial complacency. In this paper, we develop a theory that links resource acquisition with resource allocation. We argue that resources obtained through fraudulent means are less likely to be allocated to productive activities such as technological innovation. To test our theoretical predictions, we built a longitudinal dataset tracking the patenting behavior of 467 Chinese hi-tech firms applying for state grants promoting technological innovation. Because relying on a public-control agent for fraud identification would int...