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.