The Effect of Corruption on Firm Performance. A case study of Brazil

Abstract: This thesis investigates the effect of corruption on firm performance for enterprises in Brazil. Corruption is measured by the amount of bribe payments and corporate performance by the amount of total annual firm sales. For this specific study I used the Enterprise Survey data set which was published by the World Bank in 2009. The data set contains firm-level data on 1,802 non-agricultural enterprises in Brazil. The econometric analysis applies both the Ordinary Least Squares (OLS) method and the instrument variable (IV) method. The findings suggest a positive significant relationship between administrative corruption and firm performance, i.e. total firm sales increase with bribe payments. An increase in informal payments by one unit (here: US$ 1,000) leads to an increase in the total sales by 0.4% in the OLS model and to an increase in sales by 4.5% in the IV approach. Differentiating between the relative sizes of informal payments revealed a pattern in the results: the positive effect on the performance is smaller for firms paying 1% or more of their sales in bribes than for those that pay a smaller share. The results are robust and were controlled for various factors and also for different fixed effects.