Does Corruption Discourage Entrepreneurship?

Abstract

Although entrepreneurship plays a key role in economic development its precise effect remains largely unknown. This is because it is challenging to objectively measure entrepreneurship and identify its determinants. In this paper, we analyze the effect of a particular feature of the institutional landscape, namely, corruption, on entrepreneurship. It is expected that corruption discourages entrepreneurship because it undermines fair competition. We use two proxies for entrepreneurship that are widely used in the literature: (1) nascent entrepreneurship collected from Global Entrepreneurship Monitor, and (2) entry rate defined as the number of new firms divided by the total number of previous year's registered businesses, collected from World Bank Group Entrepreneurship Survey. We find that better control of corruption promotes entrepreneurship. Our evidence is stronger when we use entry rate as a proxy of entrepreneurship. Our findings are preserved when we add other determinants of entrepreneurship drawn from the literature. When we use legal origins as instruments for corruption, our results remain essentially the same. The size of population, a proxy for market size, is positively associated with entrepreneurship while corporate taxes are negatively associated.