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Corruption and Corporate Innovation

Published online by Cambridge University Press:  17 September 2019

Jesse Ellis ,
Jared Smith Open the ORCID record for Jared Smith [Opens in a new window]  and
Roger White
Jesse Ellis
Affiliation:
Ellis, jaellis5@ncsu.edu, North Carolina State University
Jared Smith*
Affiliation:
Smith, jared_smith@ncsu.edu, North Carolina State University
Roger White
Affiliation:
White, roger.white@asu.edu, Arizona State University
*
Smith (corresponding author), jared_smith@ncsu.edu
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Abstract

We examine whether political corruption impedes innovation. Using a comprehensive sample of U.S. firms, we find that corruption has a substantial, negative relation with the quantity and quality of innovation. These results are robust to using various fixed effects, proxies for corruption and innovation, and subsamples. To establish causality, we employ 2 instruments for corruption: local ethnic diversity and the corruption of the state a firm’s founder grew up in. Corruption appears to reduce innovation output both on average and for the most innovative firms. Overall, this evidence is consistent with the notion that corruption reduces social welfare by impeding innovation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2124 - 2149
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee, Utpal Bhattacharya, Abhiroop Mukherjee, Kevin M. Murphy, Andrei Shleifer, Shawn Thomas, and participants at the 2017 FIRS conference for helpful comments and suggestions. All errors are, of course, our own.

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