Abstract
We evaluate the impact of corruption on firm births in the formal sector in the 32 Mexican states. In addition to controlling for socioeconomic factors previously linked to entrepreneurship, we also evaluate the impact of corruption and corruption squared in each of the Mexican states with both spatial and non-spatial models. Our results show that corruption is positively correlated with the formation of new formal-sector firms, but corruption squared is negatively correlated with firm formation. We believe this implies that some corruption helps entrepreneurs navigate complex rules and bureaucracy but too much corruption hinders entrepreneurship. We find a strong spatial component to new firm formation.
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