October 2010
Conventional wisdom depicts corruption as a tax on incumbent firms. This
paper challenges this view in
two ways. First, by arguing that corruption matters not so much because
of the value of the bribe ("tax"),
but because of another less studied feature of corruption, namely bribe
unavoidability. Second, we argue
that the social costs of corruption arise not because corruption hurts
incumbent firms, but mostly because
it acts as a powerful barrier to the entry of new firms. Corruption sands
and greases in tandem: it helps
incumbent firms (on balance) and it hurts potential entrants. We put forward
a model in which a bureaucrat
chooses entry barriers to optimize bribe revenues. When the capacity to
collect bribes is high, it is optimal
to allow high levels of oligopoly power to incumbents. Conversely, the
more avoidable are the bribes, the
more firms are allowed into the market. These ideas are tested using a
unique, representative sample of
Brazilian manufacturing firms. Consistently with our theoretical model,
we show that corruption (a) is ranked
as the most important barrier to entry (above finance, taxes and regulation)
and (b) while bribes unavoidability
is positively related to firm performance, the size of the bribe is not.