Are corruption and taxation really harmful to growth? Firm level evidence

Exploiting a unique data set containing information on the estimated bribe payments of Ugandan firms, we study the relationship between bribery payments, taxes and firm growth. Using industry-location averages to circumvent potential problems of endogeneity and measurement errors, we find that both the rate of taxation and bribery are negatively correlated with firm growth. A one-percentage point increase in the bribery rate is associated with a reduction in firm growth of three percentage points, an effect that is about three times greater than that of taxation. This provides some validation for firm-level theories of corruption which posit that corruption retards the development process to an even greater extent than taxation. (C) 2006 Elsevier B.V. All rights reserved.