Explaining corruption: How do firms respond to non-gravity trade in developing countries?

There has been limited effort to explore whether non-gravity trade, as not driven by standard variables entering an augmented gravity model, matters for firms’ corruption. To fill this gap, this paper explores the effect of non-gravity trade on firms’ corruption in 141 developing countries during the period 2006–2017. Our results show that non-gravity trade does matter for the firms’ corruption behavior. Specifically, we find that firms’ corruption decreases by 0.09–0.23% following a unit increase in non-gravity trade (e.g. 19.7 million dollars’ increase in real trade), and the effect is much larger during the world financial crisis period. The result is robust to exploiting conditional heteroskedasticity for identification, constructing a Bartik-type instrument variable, applying different econometric technics, and using alternative measures of firm corruption.