How export shocks corrupt: Theory and evidence

Corruption is an important topic for governments and economics. A widely held belief is that exposure to international trade helps reducing corruption. In this article we show through theory and evidence that the relationship between trade and corruption is more nuanced. We show that firm level corruption actually increases when exports experience booms or busts. The reason is that export booms result in stronger incentives to favor production rather than corruption in low export settings, and vice versa in high export settings. Consequently, export busts when exports are very low, and export booms when exports are high, lead both to higher corruption. We corroborate these findings with an extensive database of some 45,000 firms from 72 developing and transition economies, surveyed over 2006–2017. We also confirm the corruption-deterrent effect of institutional quality.