Greasing the wheels? The impact of regulations and corruption on firm entry

TLDR

This paper investigates whether corruption can ‘grease the wheels’ of an economy and whether the effect of regulations on entrepreneurship depends on corruption. The authors test whether regulations robustly deter firm entry and whether corruption mitigates that deterrent in highly regulated economies. They find that more procedures and higher minimum capital requirements reduce entrepreneurship, yet corruption facilitates firm entry in highly regulated economies, with a greasing effect appearing when about 50 days are required to start a business, thereby supporting the ‘grease the wheels’ hypothesis.

Abstract

This paper investigates the question of whether corruption might ‘grease the wheels’ of an economy. We investigate whether and to what extent the impact of regulations on entrepreneurship is dependent on corruption. We first test whether regulations robustly deter firm entry into markets. Our results show that the existence of a larger number of procedures required to start a business, as well as larger minimum capital requirements are detrimental to entrepreneurship. Second, we test whether corruption reduces the negative impact of regulations on entrepreneurship in highly regulated economies. Our empirical analysis, covering a maximum of 43 countries over the 2003–2005 period, shows that corruption facilitates firm entry in highly regulated economies. For example, the ‘greasing’ effect of corruption kicks in at around 50 days required to start a new business. Our results thus provide support for the ‘grease the wheels’ hypothesis.