| Author/Presenter |
Jonathan Goyette (University of British Columbia) |
| Co-author |
Giovanni Gallipoli (University of British Columbia) |
| Title |
Corruption and the Size Distribution of Firms |
| Abstract |
A "missing middle" in the size distribution of firms in less developed countries is a fact documented by several economic studies. In this paper, we argue that the interaction of bribes and heterogeneity in firm's productivity induces patterns in firm's growth which can deliver a missing middle. Entrepreneurs who would benefit from scaling-up employment may refrain from doing so in order to remain informal and avoid paying tax liabilities and bribes. Only when productivity gains are very large the benefits may outweigh the risks of growing. While waiting for a sufficiently large productivity shock, firms substitute capital for labor. Using data for a developing country (Uganda) we document that such a substitution is taking place. We then build a theory of the missing middle where bribing acts as a selection mechanism which restricts the growth of all but the most productive firms. Under some simplifying assumptions we solve our model analytically and, in a comparative analysis, we show that an increase in the level of the average bribe or in aggregate demand exacerbates the clustering of firms in the informal sector. We construct a counterfactual economy to analyze the impact of corruption on efficiency, and use computational methods to perform policy analysis based on different corruption deterrence mechanisms. |
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