The burden of bribery: How bank credit constraints mediate the relationship between corruption and trade credit in private firms

Abstract

We examine whether corruption affects private firms' reliance on trade credit and whether this effect depends on access to formal bank financing. Using firm‐level data from the World Bank Enterprise Surveys for 60,732 private manufacturing firms across 130 countries, we measure corruption as a firm‐level indicator of whether the firm makes any informal payment or gift to public officials, and trade credit as the share of working capital financed through supplier credit or customer advances. We estimate models with country, industry, and year fixed effects and test the bank credit channel by interacting corruption with an indicator for whether the firm lacks a line of credit or loan from a financial institution. The results reveal a clear substitutability paradox: when corruption compromises the formal banking system, firms increasingly turn to supplier financing as a non‐traditional financial safety net. We find firms exposed to corruption finance 1.32 percentage points more of working capital through trade credit, equivalent to $13,200 per $1 million of working capital. This effect is significantly stronger for firms without access to a bank line of credit, consistent with the view that supplier financing serves as a substitute when corruption impairs formal lending. We further show that trade credit partially mitigates the financial constraints associated with corruption. The results are robust to instrumental variable estimation, propensity score matching, alternative measures, and placebo‐style tests. Overall, the evidence highlights a substitutability paradox: when corruption weakens the banking channel, trade credit becomes a non‐traditional financial safety net. More broadly, corruption affects not only the severity of financing constraints but also the composition of external finance in institutionally weak environments.