Affiliation:
1. Department of Law, Economics and Humanities Mediterranean University of Reggio Calabria Reggio Calabria Italy
2. Health Econometrics and Data Group University of York York UK
3. Institute for Corruption Studies Illinois State University Normal Illinois USA
4. Department of Economics and Business University of Catania Catania Italy
Abstract
AbstractSeveral scholars report that, due to reverse causality, the endogeneity problem makes it difficult to identify the real effect of institutional factors at the local level, such as corruption, on firm efficiency. This study employs a panel stochastic frontier analysis that endogenizes production efficiency and robustly assesses the effect of corruption at the local level on firms' technical efficiency. We analyze a large panel of Italian firms operating in the building sector from 2013 to 2019 showing that the determinants of local institutional quality affects firms' performance, with the rule of law and control of corruption playing a preeminent role. Controlling for endogeneity, the magnitude of the effects of institutional quality factors at the local level significantly increase. Our findings are robust to alternative IV strategies, alternative specifications of the production function, and the inclusion of other factors that may affect firm efficiency.