Corruption and the Composition of Business Activity in Brazil

It is well known that corruption is harmful to the economy. Corruption's effect on the sectoral composition of economic activity, however, is comparatively understudied. We examine the relationship between corruption and the distribution of employment and establishments across sectors in Brazilian municipalities. We test whether the shares of employees and establishments across sectors are influenced by the amount of corruption in the area. We also test whether sectors are more concentrated in general using an employment share weighted HHI measure. We find that there are larger shares of employment and establishments in the relatively non-corrupt agricultural sector in highly corrupt areas and, likewise, lower shares of employment/establishments in relative corruption-prone sectors (e.g., construction). Our strongest evidence of the impact of corruption is shown through market concentration, where concentration is higher in more corrupt municipalities across every sector.