| Summary: | We investigate the role of firm-level bribes in explaining the efficiency of within-sector production factor allocation across firms in nine Central and Eastern European (CEE) countries in 2003-2012. We find a positive association between corruption and both labour and capital misallocation dynamics, once country framework conditions are controlled for. The link is larger the smaller the country, the lower the degree of political stability and of civil liberties, and the weaker regulatory quality. Results hold when instrumenting corruption with female representation in Parliament and the freedom of the press. Targeted action against corruption in the CEE region would thus enhance within-sector allocative efficiency, in turn a determinant of sectorial, and aggregate, TFP growth.
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