Academic journal article The American Journal of Economics and Sociology

Corruption's Effect on Business Venturing within the United States

Academic journal article The American Journal of Economics and Sociology

Corruption's Effect on Business Venturing within the United States

Article excerpt

I

Introduction

As REGARDS CORRUPTION, (1) there seems to be two countrywide equilibria. Developing countries seem caught in a world with poor institutions and much corruption, while developed countries have better institutions and less corruption (Acemoglu, Johnson, and Robinson 2001; All 2003a, 2003b). These differences in institutions and corruption lead to differences in business venturing activity. In developing countries, people are forced into business venturing or entrepreneurship because employment opportunities with larger, more efficient firms do not exist. (2) De Soto (1990, 2003) describes these survivalist entrepreneurs in developing countries, where corruption, high transaction costs, low capital, and a need to stay beneath the radar of the local shakedown artists prevent firms from reaching efficient size. On the other hand, in more developed countries, corruption is lower, so people may choose business venturing rather than employment with a firm. In this case, business venturers are the engine for growth: taking risks, hiring employees, and innovating (Kirzner 1973; Knight 1921; Schumpeter 1934).

While no U.S. state has corruption on the level seen in many developing countries, we explore evidence on whether business venturing in the United States is innovator-driven, or if it resembles the poor-institution, high-corruption, survivalist view. At U.S. levels of corruption, does corruption lead to business venturing either directly or indirectly? In contrast to Glaeser and Saks (2006), who focus on institutional causes for corruption, such as ethnic fractionalization and education levels, we focus on the effects of corruption on economic activity, specifically, the launching of new ventures.

II

The Specification Problem

WE FACE THE OBVIOUS specification problem--determining the direction of causality among venturing, income, and corruption. We adopt an institutional argument similar to that of North (1981) or Hayek (1960) and recently popularized by the World Bank: economic growth and development are the outcome of market and other economic shocks, and of government institutions and policy, Several studies (Knack and Keefer 1995; Mauro 1995; Hall and Jones 1999; Rodrik 1999; Goldsmith 1999; Ali 2003a) show that the primary causality runs from institutions and policies to corruption and to income, rather than the other way around. While governments cannot select a vector of economic shocks, they can select policies. Governments can choose whether to combat corruption or allow it to flourish. Acemoglu, Johnson, and Robinson (2001) surmounted their endogeneity problem by using the mortality rates of colonial-era Europeans in a given locale as instruments for current institutions. Glaeser and Saks use Congregational church membership in 1890 and high school graduation rates in 1928 as instruments when finding that states with more education are less corrupt. Unfortunately, we felt that these instruments were not relevant to our question of business venturing. Furthermore, business venturing is collinear with our income and corruption measures.

Due to these econometric issues, we use the means by state of our variables over the sample period of 1989 to 2002 to estimate a system of three equations using throe-stage least squares, with equations for business venturing, income, and corruption. The balance of our evidence indicates that business venturing in the United States is at least partially a response to poor institutional and economic conditions. Thus, some business venturing in the United States--if not entrepreneurship per se--conforms to the De Soto "survivalist entrepreneur" view.

III

Measuring Entrepreneurship/Business Venturing

ENTREPRENEURSHIP IS NEITHER universally defined nor universally operationalized (Gartner 1990; Baumol 1968). Again, we avoid this debate by focusing on a specific economic activity, rather than on entrepreneurial behavior per se. …

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