Expected corruption and business formation

Abstract

Purpose

The purpose of this paper is to investigate whether public corruption influences entrepreneurial activity in the USA. Because the true underlying level of corruption is inherently unobservable, it cannot be factored into business venturing decisions. The authors hypothesize, therefore, that new business venturing should be related to the expected corruption level.

Design/methodology/approach

The authors follow Cordis (2009) to calculate the expected rate of public corruption given observed levels of public corruption. The authors embed the expected level of corruption in a relatively standard model of business venturing, which the authors estimate using a cross section of the US states covering the period of 1986-2009.

Findings

Using a relatively standard model of business venturing that accounts for variation in predicted corruption levels, the authors find that entrepreneurs launch more businesses in states with higher predicted corruption.

Originality/value

To the knowledge, no one has previously tested the impact of expected corruption on entrepreneurial activity.

Citation

Campbell, N. and S. Cordis, A. (2014), "Expected corruption and business formation", Journal of Entrepreneurship and Public Policy, Vol. 3 No. 2, pp. 292-305. https://doi.org/10.1108/JEPP-06-2013-0026