Corruption and Entrepreneurship: How Formal and Informal Institutions Shape Small Firm Behavior in Transition and Mature Market Economies

Article excerpt

This article explores the determinants of corruption in transition economies of the post-Soviet Union, Central-Eastern Europe, and Western industrialized states. We look in-depth at the East-West gap in corruption, and why entrepreneurs and small business owners become engaged in corrupt deals. Part of the answers lie in the country-specific formal and informal institutional make-up. The likelihood of engaging in corruption is influenced by the lower efficiency of financial and legal institutions and the lack of their enforcements. Also, viewing illegal business activities as a widespread business practice provides the rationale for entrepreneurs to justify their own corrupt activities. Moreover, closed social networks with family, friends, and national bureaucrats reduce the opportunism of the contracting party of the corrupt deal, thus providing breeding grounds for corruption.


Transition economies' environments can be characterized as corrupt (Hellman, Jones, Kaufman, & Shankerman, 2000; Radaev, 2004; Rose, 2000). Particularly, corruption rates in most post-Soviet countries are among the highest in the world, and they continue to rise (Bjornskov & Paldam, 2002; Transparency International, 2008). Although there have been increases of corruption in advanced Western economies, there still exists a tremendous gap in corruption levels between East and West (Bjornskov & Paldam; Treisman, 2000; Uslaner & Badescu, 2004). However, surprisingly little is known about why corruption levels are significantly higher in transition economies than those in mature market economies. Against this background, this study sets out to fill this gap, that is, to explain the factors that are responsible for higher corruption levels in transition economies as compared with those in industrialized welfare states in Western Europe and North America. Our research makes several important contributions to the literature.

First, our study draws on the new institutional economics (Denzau & North, 1994; North, 1990, 1997, 2005; Williamson, 1975), a theoretical approach that has only been picked up recently in corruption research (Lambsdorff, 2002b, 2006). While previous work has mostly investigated the influence of formal institutional constraints on corruption, we consider the impact of both formal institutions and informal institutions on businesspeople's decisions to become involved in corruption.

Second, prior studies have mostly focused on public officers as bribe takers, trying to answer the question "why do officials in some countries misuse public office for private gain more frequently and for larger payoffs than officials in others?" (Lambsdorff, 2006; Treisman, 2000, p. 402). Yet, corruption involves both the bribe-payers and bribe-takers (Bardhan, 2003, 2006). Subsequently, a thorough investigation of corruption requires the analysis of the determinants of corrupt behavior of entrepreneurs as bribe-payers. Third, while most prior work of the causes of corruption has been done on the macro level, our study puts emphasis on examining micro-level determinants of the business actor's decision to corrupt. That is, we employ an "economic microscope" (Birch, 1979, p. 24) approach, which helps to understand how actors behave at the micro level and, why exactly they become engaged in corruption. Additionally, we control for macro level antecedents of corruption. Using a large dataset with 2,576 entrepreneurs and small business owners in 20 transition and mature market economies, we employ hierarchical linear models, Heckman correction, and multiple imputation of missing values to test our hypotheses.

The rest of the article is structured as follows. First, we elaborate on the theoretical arguments and develop testable hypotheses. Then, we provide a description of the data source, variables, methods, and findings. Finally, we conclude with a discussion and implications for policy makers and firms. …