Governmental decentralization and corruption revisited: Accounting for potential endogeneity

- Estimate the causal effect of decentralization on corruption in the absence of traditional instrumental variable.
- Identification achieved by applying Lewbel (2012) approach.
- Mild evidence of political decentralization being endogenous.
- Controlling for it yields significantly larger positive effect on corruption.
- Fiscal decentralization reduces corruption; there is no evidence it is endogenous.

The causal effect of governmental decentralization on firm-level corruption is inconclusive due to the difficulty in obtaining a traditional instrumental variable. Circumventing the issue by using the Lewbel (2012) identification strategy, we find mild evidence of political decentralization being endogenous but no support for fiscal decentralization being endogenous.