Bribes, Rents and Industrial Firm Performance in Albania and Kosovo

Using data from a novel representative survey, we examine how corruption affects the performance of industrial-sector firms in Albania and Kosovo, two low-middle-income post-socialist economies in the Western Balkan region. Bribes are costs that firms incur to "grease the wheels" of the bureaucracy and/or to seek rents. Rents, however, may improve firm performance. Thus, to estimate the total effect of corruption, we develop and collect a set of perception-based indicators of both corruption and rents. In addition, we allow both bribery and rents to affect output growth through multiple channels-by influencing the firm's investment and hiring decisions, by affecting total-factor productivity and by modifying the marginal product of factor additions. We find that, in Albania and Kosovo, bribes and rents have both positive and negative effects on firm performance. The net effect of corruption, however, is negative and large and is not fully offset by the beneficial effects of rents.