The Effects of Corruption and Regulation on Business Entrepreneurship: Evidence from American States

While there is a large volume of cross-country studies identifying and measuring adverse impacts of corruption, empirical analyses of whether and how corruption actually affects entrepreneurship in the U.S. context are still limited. This study investigates the impact of public officials' corruption on state entrepreneurial activities, measured by new business creation, by drawing on the new institutional economics theory and theory of the second best. The analysis of all 50 American states over the period 1997-2012 provides strong evidence that the detrimental effect of corruption does exist on new business establishments in the United States. Furthermore, the degree of bureaucratic regulation moderates the effect of corruption on state entrepreneurial activities. Specifically, higher levels of bureaucratic business regulation would magnify the negative effects of corruption on state new business activities.