Corruption, Protection Rackets, and Cash Policy: Evidence from a Natural Experiment

Abstract

We study the effects of a 2016 U.S. Supreme Court decision that made it harder for prosecutors to bring corruption cases against public servants. We argue that this exogenous shock to anticorruption enforcement created a “protection racket”: regulated firms located in high-corruption states increased their cash reserves in the years after the decision, presumably to make illicit payments to local politicians. These firms experienced negative abnormal returns near the decision and saw the value of cash decrease afterward. Consistent with the protection hypothesis, regulated firms in high-corruption states became less likely to be penalized by government agencies after the decision.