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We argue that corruption can decrease aggregate productivity by deteriorating firm management practices. 

We investigate the impact of regional corruption on the management quality of firms within the manufacturing sector in Central and Eastern Europe. The empirical challenge is that bribing practices in the public sector may evolve in response to firm behaviours, and regional corruption is measured with error. To identify causal effects, our preferred specifications use a difference-in-differences methodology. We measure the manufacturing industries' sensitivity to corruption using their level of dependence to contract institutions. Controlling for regional and manufacturing industry - country fixed effects, we find that firms in more contract dependent industries located in more corrupt regions tend to have lower management quality, more centralized decision-making process and lower level of education of administrative workers. In more corrupt regions, contract dependent firms are also characterized by lower investments in R&D and smaller product markets. We show that these results are unlikely to be driven by omitted variables, outliers, or reverse causality.

Daphne is Teaching Fellow at ¹û¶³Ó°Ôº SSEES and about to complete her PhD thesis on linkages between corruption and private and public sector management. She presented her research at number of international conference including Annual Conference of the Royal Economic Society and Asian Meeting of the Econometric Society.

• For more details contact: Dr Svetlana Makarova

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