Does Corruption Hinder Private Businesses? Leadership Stability and Predictable Corruption in China

Abstract

We study whether corruption hinders businesses by investigating China’s private enterprises, which have developed rapidly despite high corruption levels. We argue that a key factor determining the effects of corruption is corruption predictability, which is significantly influenced by government leadership stability. When the same leaders remain in major offices for long tenures, corruption is relatively predictable, reducing hindrance to businesses. When leaders change frequently, entrepreneurs need to constantly cultivate new connections with officials and face more uncertainty; therefore, corruption becomes a major obstacle. We conduct field interviews to explore channels through which leadership stability encourages predictable corruption. We also use the 2012 World Bank Enterprise Survey of Chinese private firms and develop a novel measure of leadership stability of the local Chinese government based on a self-collected data set of municipal party committees to test our hypotheses. Results of various models are consistent with our hypotheses.