Abstract
The dominant 'sand in the wheels' view holds that entrepreneurship is strongly inhibited by corruption. Challenging this, the 'grease the wheels' view maintains that corruption might increase entre-preneurship in highly regulated economies. We extend the basic predictions of these theories by examining entrepreneurs' start-up decisions, as well as their location choices, in a seemingly low-corruption environment: Swedish municipalities. Combining a validated index of corruption perceptions in local government with population data on new entrepreneurs , nested logit models reveal that even in a low-corruption setting such as Sweden, perceptions of corruption can deter latent entrepreneurs. We also find that a minority of entrepreneurs relocate from their home municipalities to establish their start-ups elsewhere. Surprisingly and contrary to expectations, these relocating entrepreneurs often relocate from relatively low-corruption municipalities to others that are more corrupt. Implications for future research and public policy are discussed. Plain English Summary The effect of corruption in local government is often overlooked in entrepreneur-ship research. This paper finds that even in one of the world's least corrupt countries—Sweden—local government corruption discourages the will to start new firms. Most scholars agree that corruption discourages people from starting new firms. However, a few studies have lately suggested that corruption—under specific circumstances—may actually increase entrepreneurship when bureaucracies are highly regulated and inflexible. This paper delves deeper into the salience of these contradictory views by studying municipalities in Swe-den. This low-corruption country is highly regulated with an efficient but, at times, rigid bureaucracy. Using a combination of survey and business register data, we find that even in this low-corruption environment, corruption decreases the rate of entrepreneurship. Surprisingly , though, a minority of entrepreneurs relocate from their relatively low-corruption home municipalities to establish their start-ups in others that are more corrupt.
