Does Public Funding of Parties Reduce Corruption? Evidence from Firm-Level Data

Does the provision of state subsidies to political parties undermine their involvement in corrupt exchanges and reduce their reliance on illegal funding? Existing research provides inconclusive evidence on this relationship. Yet cross-national studies on party funding-corruption linkage are often limited by very general measures of party funding regime and corruption perception indexes. In this study, we overcome this limitation by employing focused measures of political financing and party corruption to investigate whether more generous public funding of political parties reduces corruption. Our key explanatory variable is a new measure of the annual cash amount of direct public funding per vote granted to political parties across 27 post-communist countries over three decades of transition (1990-2020). Our dependent variable of party-centred corruption represents the share of firms (based on firm-level data from the Business Environment and Enterprise Performance Survey, 1999-2020) considerably affected by the informal payments made to political parties and parliamentarians to influence their decisions. Using various specifications of fixed-effects models, we find a negative association between a higher level of state subsidies and lower corruption. Previous null results may have been due to the relatively blunt measurement of key concepts.