Competition and Corruption: Lessons from 150 Years of Industrial Governance

In this working paper, Dr. Troesken argues that political corruption and market competitiveness are inversely related. Highly competitive markets drive out corruption, while markets with high natural barriers to entry (e.g., those characterized by declining marginal costs and high fixed costs) allow corruption to flourish. Competition drives out corruption because corruption is costly and highcost enterprises are at a competitive disadvantage. The inverse relationship between corruption and competitiveness is demonstrated by reviewing the history of three industries: whiskey distilling (highly competitive); oil refining (moderately competitive); and public utilities such as gas, electric, and water (not competitive).