CORRUPTION, PRODUCT MARKET COMPETITION, AND INSTITUTIONAL QUALITY: EMPIRICAL EVIDENCE FROM THE US STATES

This article argues that the effect of corruption on competition is dependent on the institutional environment. When institutions are relatively efficient, observed corruption is likely to be associated with relatively less competition. Conversely, in areas with low quality institutions (e.g., excessively burdensome regulations), corruption may lead to relatively more competition. I employ unique data on competition, corruption, and institutional quality across U.S. states from 1997 to 2009 and report that a higher level of corruption is associated with relatively more competition in states with low levels of institutional quality. However, as institutional quality improves, the effect of corruption worsens. Thus, institutional quality is a fundamental determinant of the corruption-competition relationship. Improving institutional quality, while at the same time reducing corruption, will increase competition and likely improve economic outcomes. (JEL D73, O17, L26)