Corruption and Destructive Entrepreneurship : How Corruption Affects the Allocation of Resources

The negative effects of corruption at the macro level are well documented. Corruption reduces economic growth, lowers investment, and corrodes trust in government officials creating an institutional environment which pushes entrepreneurs from productive to destructive activities. In corrupt regimes, rent-seeking and cronyism crowd out value-creating entrepreneurship. Corruption also has effects at the micro level because some industries are better situated to profit from corruption than others. Corruption not only lowers economic output but also shifts resources toward some industries and away from others. Using convictions for violations of federal corruption laws in the United States as a measure of corruption, regression results show that increased corruption shifts resources toward the construction industry and away from non-profit firms and education. The evidence also shows that the distance from state capitals and voter turnout moderate the relationship between corruption and firm concentrations