U.S. Political corruption and labor investment (in)efficiency

Abstract

This study examines the impact of political corruption on firm labor investment efficiency. We find that firms headquartered in areas with higher levels of corruption have more inefficient levels of labor investment. Firms in more corrupt environments have weaker monitoring brought about by information opacity as well as a need to shield their assets, which prompts them to adopt inefficient labor investment policies. These results are robust to considerations of omitted variable bias, selection bias, and other endogeneity concerns. The present research has broad implications for society, particularly employees, as it shows that political corruption causes firms to deviate from optimal labor investment decisions.