Abstract

Social scientists and policymakers have long believed that economic corruption affects entrepreneurial activity. They have differed, however, on precisely why and how corruption matters. One group, employing transaction cost reasoning, argues that corruption erodes trust and hence increases the costs of doing business. The parties involved in entrepreneurial ventures have to invest not only in bribes and payoffs but also incur heavier costs of monitoring each other because of lower levels of trust. (Casson, 1982; Casson and Godley, 2005) A second group emphasizes instead that corruption in institutional environments affects the allocation of entrepreneurial activity. Corrupt institutions do not so much lessen the incentive for entrepreneurship as it creates alternative (often less socially productive) paths in which entrepreneurial effort can be invested. (Baumol, 1994) Finally, network or embedded approaches to the subject distinguish between the generalized trust emphasized in the first two approaches and particularized trust in family, kin, and associates. The latter kind of trust, these scholars point out, may actually allow corruption to facilitate certain kinds of entrepreneurship. (Tonoyan, 2004)

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