China’s Anti-Corruption Campaign and Entrepreneurship

This paper investigates the causal effect of corruption on entrepreneurship. We use staggered anti-corruption investigations in China as exogenous shocks to conduct difference-in-differences estimation, and find that the country's anti-corruption campaign has a sizeable positive effect on entrepreneurship, especially in urban areas, areas with high levels of trust, and areas with short verdict process after investigation. We discuss four plausible mechanisms for the positive effect of the anti-corruption campaign: reduced rent seeking, improved government quality, technology spillover from innovation, and the easing of financial constraints for non-SOEs. Our results are robust to a battery of tests based on different specifications and alternative measures. Overall, this study provides a timely evaluation of the importance of anti-corruption efforts in a typical emerging market