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


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.


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

JEL Classification

D73 F59 M13 L26 


  1. Anderson, C., & Tverdova, Y. (2003). Corruption, political allegiances, and attitudes toward government in contemporary democracies. American Political Science Review, 47(1), 91–109. CrossRefGoogle Scholar
  2. Antunes, A. R., & de V. Cavalcanti, T. V. (2007). Start up costs, limited enforcement, and the hidden economy. European Economic Review, 51(1), 203–224. CrossRefGoogle Scholar
  3. Bailey, D. H. (1966). The effects of corruption in a developing nation. Western Political Quarterly, 19(4), 719–732. CrossRefGoogle Scholar
  4. Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time-series cross-section data. American Political Science Review, 89(3), 634–647. CrossRefGoogle Scholar
  5. Beck, N., & Katz, J. N. (1996). Nuisance vs. substance: specifying and estimating time-series cross-section models. Political Analysis, 6(1), 1–36. CrossRefGoogle Scholar
  6. Beck, P. J., & Mahler, M. W. (1986). A comparison of bribery and bidding in thin markets. Economics Letters, 20(1), 1–5. CrossRefGoogle Scholar
  7. Bjørnskov, C., & Foss, N. J. (2008). Economic freedom and entrepreneurial activity: some cross-country evidence. Public Choice, 134(3), 307–328. CrossRefGoogle Scholar
  8. Blankart, C. B. (2003). Öffentliche Finanzen in der Demokratie (5th ed.). Munich: Vahlen. Google Scholar
  9. Campos, J. E., Lien, D., & Pradhan, S. (1999). The impact of corruption on investment: predictability matters. World Development, 27(6), 1059–1067. CrossRefGoogle Scholar
  10. Campos, N., Dimova, R., & Saleh, A. (2010). Whither corruption? A quantitative survey of the literature on corruption and growth (CEPR Discussion Paper No. 8140). Google Scholar
  11. Ciccone, A., & Papaioannou, E. (2007). Red tape and delayed entry. Journal of the European Economic Association, 5(2–3), 444–458. CrossRefGoogle Scholar
  12. DeLong, B., & Eichengreen, B. (2002). Between meltdown and moral hazard: the international monetary and financial policies of the Clinton administration. In J. Frankel & P. Orszag (Eds.), American economic policy in the 1990s (pp. 191–254). Cambridge: MIT Press. Google Scholar
  13. Desai, M., Gompers, P., & Lerner, J. (2003). Institutions, capital constraints and entrepreneurial firm dynamics: evidence from Europe (NBER Working Paper 10165). Google Scholar
  14. Djankov, S., La Porta, R., Lopes-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117(1), 1–37. CrossRefGoogle Scholar
  15. Dreher, A., & Siemers, L.-H. R. (2009). The intriguing nexus between corruption and capital account restrictions. Public Choice, 140(1–2), 245–265. CrossRefGoogle Scholar
  16. Dreher, A., Kotsogiannis, C., & McCorriston, S. (2009). How do institutions affect corruption and the shadow economy? International Tax and Public Finance, 16(6), 773–796. CrossRefGoogle Scholar
  17. Edwards, S. (1999). How effective are capital controls? Journal of Economic Perspectives, 13(4), 65–84. CrossRefGoogle Scholar
  18. Freytag, A., & Thurik, R. (2007). Entrepreneurship and its determinants in a cross-country setting. Journal of Evolutionary Economics, 17(2), 117–131. CrossRefGoogle Scholar
  19. Friedrich, R. J. (1982). In defense of multiplicative terms in multiple regression equations. American Journal of Political Science, 26(4), 797–833. CrossRefGoogle Scholar
  20. Gwartney, J., & Lawson, R. (2006). Economic freedom of the world: 2006 annual report. Vancouver: Fraser Institute. Google Scholar
  21. Huntington, S. P. (1968). Political order in changing societies. New Haven: Yale University Press. Google Scholar
  22. Kaufman, D., & Wei, S.-J. (2000). Does ‘grease money’ speed up the wheels of commerce? (IMF Working Paper 00/64). Google Scholar
  23. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2006). Governance matters V: governance indicators for 1996–2005. World Bank Institute. Google Scholar
  24. Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82(3), 591–629. CrossRefGoogle Scholar
  25. Kurer, O. (1993). Clientelism, corruption and the allocation of resources. Public Choice, 77(2), 259–273. CrossRefGoogle Scholar
  26. Leff, N. H. (1964). Economic development through bureaucratic corruption. American Behavioral Scientist, 8(3), 8–14. CrossRefGoogle Scholar
  27. Leamer, E. E. (1983). Let’s take the con out of econometrics. American Economic Review, 73(1), 31–43. Google Scholar
  28. Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-county growth regressions. American Economic Review, 82(4), 942–963. Google Scholar
  29. Leys, C. (1965). What is the problem about corruption? Journal of Modern African Studies, 3(2), 215–230. CrossRefGoogle Scholar
  30. Lien, D. H. D. (1986). A note on competitive bribery games. Economics Letters, 22(4), 337–341. CrossRefGoogle Scholar
  31. Lui, F. T. (1985). An equilibrium queuing model of bribery. Journal of Political Economy, 93(4), 760–781. CrossRefGoogle Scholar
  32. Mauro, P. (1998). Corruption and the composition of government expenditures. Journal of Public Economics, 69(2), 263–279. CrossRefGoogle Scholar
  33. Méon, P.-G., & Sekkat, K. (2005). Does corruption grease or sand the wheels of growth? Public Choice, 122(1), 69–97. CrossRefGoogle Scholar
  34. Méon, P.-G., & Weill, L. (2010). Is corruption an efficient grease? World Development, 38(3), 244–259. CrossRefGoogle Scholar
  35. Méon, P.-G., Schneider, F., & Weill, L. (2011). Does taking the shadow economy into account matter to measure aggregate efficiency? Applied Economics, 43(18), 2303–2311. CrossRefGoogle Scholar
  36. Minniti, M., Bygrave, W. D., & Autio, E. (2005). Global entrepreneurship monitor 2005 executive report. Wellesley: Babson College. Google Scholar
  37. Musgrave, R. A. (1959). The theory of public finance. New York: McGraw Hill. Google Scholar
  38. Myrdal, G. (1986). Asian drama: an enquiry into the poverty of nations (Vol. 2). New York: Twentieth Century Fund. Google Scholar
  39. Noorderhaven, N., Thurik, R., Wennekers, S., & van Stel, A. (2004). The role of dissatisfaction and per capita income in explaining self-employment across 15 European countries. Entrepreneurship Theory and Practice, 28(5), 447–466. CrossRefGoogle Scholar
  40. Nye, J. (1967). Corruption and political development: a cost-benefit analysis. American Political Science Review, 61(2), 417–427. CrossRefGoogle Scholar
  41. OECD (2007). Statistical compendium. CD-Rom. Paris: OECD. Google Scholar
  42. Ovaska, T., & Sobel, R. S. (2005). Entrepreneurship in post-Socialist economies. Journal of Private Enterprise, 21(1), 8–28. Google Scholar
  43. Parker, S. C., & Robson, M. T. (2004). Explaining international variations in self-employment: evidence from a panel of OECD countries. Southern Economic Journal, 71(2), 287–301. CrossRefGoogle Scholar
  44. Pigou, A. C. (1928). A study in public finance (3rd ed., 1947). London: Macmillian. Google Scholar
  45. Rose-Ackerman, S. (1997). The political economy of corruption. In K. A. Elliott (Ed.), Corruption and the global economy (pp. 31–60). Washington: Institute for International Economics. Google Scholar
  46. Rose-Ackerman, S. (1999). Corruption and government: causes, consequences, and reform. Cambridge: Cambridge University Press. CrossRefGoogle Scholar
  47. Sala-i-Martin, X. (1997). I just ran two million regressions. American Economic Review, 87(2), 178–183. Google Scholar
  48. Sala-i-Martin, X., Doppelhofer, G., & Miller, R. I. (2004). Determinants of long-term growth: a Bayesian averaging of classical estimates (BACE) approach. American Economic Review, 94(4), 813–835. CrossRefGoogle Scholar
  49. Scarpetta, S., Hemmings, P., Tressel, T., & Woo, J. (2002). The role of policy and institutions for productivity and firm dynamics: evidence from micro and industry data (Working Paper No. 329). OECD Economics Department. Google Scholar
  50. Schneider, F. (2005a). Shadow economies around the world: what do we really know? European Journal of Political Economy, 21(3), 598–642. CrossRefGoogle Scholar
  51. Schneider, F. (2005b). Shadow economies of 145 countries all over the world: estimation results of the period 1999–2003 (Discussion Paper). Department of Economics, University of Linz. Google Scholar
  52. Schneider, F., & Enste, D. H. (2000). Shadow economies: size, causes, and consequences. Journal of Economic Literature, 38(1), 77–114. CrossRefGoogle Scholar
  53. Shleifer, A., & Vishny, W. (1993). Corruption. Quarterly Journal of Economics, 108(3), 599–617. CrossRefGoogle Scholar
  54. Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics, 2(1), 3–21. CrossRefGoogle Scholar
  55. Sturm, J.-E., & de Haan, J. (2002). How robust is Sala-i-Martin’s robustness analysis? (Mimeo). University of Konstanz. Google Scholar
  56. Tanzi, V. (1998). Corruption around the world: causes, consequences, scope, and cures. IMF Staff Papers, 45(4), 559–594. CrossRefGoogle Scholar
  57. Temple, J. (2000). Growth regressions and what the textbooks don’t tell you. Bulletin of Economic Research, 52(3), 181–205. CrossRefGoogle Scholar
  58. Treisman, D. (2000). The causes of corruption: a cross-national study. Journal of Public Economics, 76(3), 399–457. CrossRefGoogle Scholar
  59. Uhlaner, L., & Thurik, R. (2007). Postmaterialism influencing total entrepreneurial activity across nations. Journal of Evolutionary Economics, 17(2), 161–185. CrossRefGoogle Scholar
  60. van Stel, A., Wennekers, S., Thurik, R., & de Wit, G. (2003). Explaining nascent entrepreneurship across countries (SCALES Working Paper No 200301). Google Scholar
  61. Verheul, I., van Stel, A., & Thurik, R. (2006). Explaining female and male entrepreneurship at the country level. Entrepreneurship and Regional Development, 18(2), 151–183. CrossRefGoogle Scholar
  62. Vial, V., & Hanoteau, J. (2010). Corruption, manufacturing plant growth, and the Asian paradox: Indonesian evidence. World Development, 38(5), 693–705. CrossRefGoogle Scholar
  63. Wennekers, S., & Thurik, R. (1999). Linking entrepreneurship and economic growth. Small Business Economics, 13(1), 27–55. CrossRefGoogle Scholar
  64. Wennekers, S., Thurik, R., van Stel, A., & Noorderhaven, N. (2007). Uncertainty avoidance and the rate of business ownership across 21 OECD countries, 1976–2004. Journal of Evolutionary Economics, 17(2), 133–160. CrossRefGoogle Scholar
  65. World Bank (2006). World development indicators. CD-Rom. Washington: World Bank. Google Scholar

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

Personalised recommendations