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Public Choice

, Volume 155, Issue 3–4, pp 413–432 | Cite as

Greasing the wheels? The impact of regulations and corruption on firm entry

  • Axel Dreher
  • Martin Gassebner
Open Access
Article

Abstract

This paper investigates the question of whether corruption might ‘grease the wheels’ of an economy. We investigate whether and to what extent the impact of regulations on entrepreneurship is dependent on corruption. We first test whether regulations robustly deter firm entry into markets. Our results show that the existence of a larger number of procedures required to start a business, as well as larger minimum capital requirements are detrimental to entrepreneurship. Second, we test whether corruption reduces the negative impact of regulations on entrepreneurship in highly regulated economies. Our empirical analysis, covering a maximum of 43 countries over the 2003–2005 period, shows that corruption facilitates firm entry in highly regulated economies. For example, the ‘greasing’ effect of corruption kicks in at around 50 days required to start a new business. Our results thus provide support for the ‘grease the wheels’ hypothesis.

Keywords

Corruption Start-ups ‘Grease the wheels’ Entrepreneurship Regulation Doing business 

JEL Classification

D73 F59 M13 L26 

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Copyright information

© The Author(s) 2011

Authors and Affiliations

  1. 1.Alfred-Weber-Institute for EconomicsHeidelberg UniversityHeidelbergGermany
  2. 2.University of GoettingenGoettingenGermany
  3. 3.CESifoMunichGermany
  4. 4.IZABonnGermany
  5. 5.KOF Swiss Economic InstituteETH ZurichZurichSwitzerland

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