Abstract
I provide evidence that U.S. firms in more corrupt areas have lower investment expenditure than firms in less corrupt areas. A one standard deviation increase in corruption rate is associated with a 8.6% decline in a firm’s investment from the median. Firms with a high degree of geographical concentration cut investment spending more aggressively in response to corruption. Notably, firms primarily scale down on research and development. I also find that political connections insulate firms from the negative impact of corruption. The investment reduction effect is almost non-existent in firms well connected to politicians. This finding further affirms the advantage that politically connected firms enjoy over non-connected firms.
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