When does corruption grease wheels of an economy

Abstract

We engage an enduring the long-time debate about on the effect of corruption on economic growth development using the case of China, which is famous for the coexistence of rapid economic development and high-level of corruption. We argue in a society where official corruption is common pervasive and informal institutions are important for doing business, whether corruption hinders private business operation highly depends on the stability of local government leadership. When the same leaders stay in major offices for long tenures, corruption is relatively manageable for entrepreneurs. They can maintain a stable informal connection with the same group of leaders when bribes are predictable. Conversely, when leaders the leadership changes frequently, entrepreneurs need to constantly cultivate new connections with officials and face more uncertainty. Our hypotheses are verified by both field interviews and regressions employing a recent World Bank survey in Chinese cities and our self-compiled leadership dataset.