Is a Corruption Crackdown Really Good for the Economy? Firm-Level Evidence from China

We study the impact of anticorruption efforts on firm performance, exploiting an unanticipated corruption crackdown in China’s Heilongjiang province in 2004. We compare firms in the affected regions with those in other inland regions before and after the crackdown. Our main finding is an overall negative impact of the crackdown on firm productivity and entry rates. Furthermore, these negative impacts are mainly experienced by private and foreign firms, while state-owned firms are mostly unaffected. We present evidence concerning two potential explanations for our findings. First, the corruption crackdown may have limited bribery opportunities that helped private firms operate. Second, the corruption crackdown may have interfered with personal connections between private firms and government officials to a greater extent than institutional connections between state-owned firms and the government. Overall, our findings suggest that corruption crackdowns may not restore efficiency in the economy, but instead lead to worse economic outcomes, at least in the short run (JEL L2, M1, O1).