Greasing the wheels? the effect of corruption in regulated manufacturing sectors of India

We investigate whether corruption "greases the wheels" of bureaucracies and enhances economic performance. Specifically, by taking advantage of variations in the timing of delicensing of three-digit manufacturing sectors in India and differences in the extent of corruption across regional states in India, we examine whether corruption has positive effects in regulated manufacturing sectors but not in unregulated manufacturing sectors. Our estimation results show that the marginal effects of corruption are significantly positive on both gross value added per worker and capital-to-labour ratio in regulated sectors. This result supports the "grease the wheels" hypothesis.