This Website uses cookies. By using this website you are agreeing to our use of cookies and to the terms and conditions listed in our data protection policy. Read more

Working Paper No. 1323

Does Local Government Corruption Inhibit Entrepreneurship?

Working Paper
Wittberg, Emanuel, Gissur Ó Erlingsson and Karl Wennberg (2020). “Does Local Government Corruption Inhibit Entrepreneurship?”. IFN Working Paper No. 1323. Stockholm: Research Institute of Industrial Economics (IFN).

Emanuel Wittberg, Gissur Ó Erlingsson, Karl Wennberg

The dominant ‘sand in the wheels’-view holds that entrepreneurship is strongly inhibited by corruption. Challenging this, the ‘grease the wheels’-view maintains that corruption might increase entrepreneurship in highly regulated economies. We extend the basic predictions of these theories by examining entrepreneurs’ start-up decisions, as well as their location choices, in a seemingly low-corruption environment: Swedish municipalities. Combining a validated index of corruption perceptions in local government with population data on new entrepreneurs, nested logit models reveal that even in a low-corruption setting such as Sweden, perceptions of corruption can deter latent entrepreneurs. We also find that a minority of entrepreneurs relocate from their home municipalities to establish their start-ups elsewhere. Surprisingly and contrary to expectations, these relocating entrepreneurs often relocate from relatively low-corruption municipalities to others that are more corrupt. Implications for future research and public policy are discussed.