Non-random selection into entrepreneurship in the realm of government decentralization and corruption

Abstract

For the past few decades, the extant literature on corruption has primarily relied on firm-level survey measures – for example, those from the World Bank – to explore the relevant empirical determinants of this illegal practice. However, these studies have potentially overlooked an underlying econometric problem – namely, non-random selection into entrepreneurship – that may bias all the estimated determinants to date if ignored in the analysis. Here, I assess this possibility by applying the traditional Heckman (1979) correction procedure in a novel way: using two different samples. I use my proposed solution in the context of government decentralization and firm-level corruption as a plausible application. Specifically, I revisit the question of the causal impact of government decentralization on firm-level corruption when the underlying sample selection issue is addressed. Results are worth noting. I find reasonable evidence of selection bias. On controlling for this, fiscal decentralization substantially decreases firm-level bribery, in general. This finding is in contradiction to the results reported by naive estimation strategies where the sample selection issue is completely ignored.