Corruption and Corporate Innovation

Jesse Ellis, Jared Smith, and Roger White

We examine whether political corruption impedes innovation. Using data on US firms, we find that corruption has a substantial, negative relation with the quantity and quality of innovation. These results are robust to using various fixed effects, proxies for corruption and innovation, and subsamples. To establish causality, we employ two instruments for corruption: local ethnic diversity and the corruption of the state a firm’s founder grew up in. Corruption appears to reduce innovation output both on average and for the most innovative firms. Overall, this evidence is consistent with the notion that corruption reduces social welfare by impeding innovation.