It is widely acknowledged that corruption hampers economic development. One widely theorized potential effect of corruption is that may affect incentives for entrepreneurship. Several scholars suggest that corruption decreases the number of businesses. Furthermore, others focus on the composition of entrepreneurial activities, hypothesizing that corruption may lead to “misallocation of talent” and “destructive entrepreneurship”. In this paper, we attempt to move closer in on the alleged mechanisms at work by employing register data on business start-ups to investigate the effect of corruption at the administrative level of municipalities. Applying multilevel modelling on discrete data, we test whether potential entrepreneurs’ propensity to start new businesses is affected by (perceived) local corruption levels and the structure of the local market. This study is the first to investigate entrepreneurship at the individual level in relation to the within-country variation of corruption at the local level. Consequently, our study is an important contribution to understanding how corruption may affect entrepreneurship as well as economic development at the local level.
