that previously negative effects of e-filing adoption are insignificant when we use placebo treatments (Table B.6, columns VII and VIII, and Table B.7 in the Online Appendix). We thus confirm that the results presented in Section 4.1 are not random, and that e-filing implementation does indeed reduce tax compliance costs. We do not conduct similar tests for public procurement, as the direct effects on e- procurement are not significant in the main analysis.

Our firm-level data for the ECA region allows us to control for firm fixed effects. Therefore, we repeat firm-level analysis on the sub-sample of firms from the ECA region and compare estimates from two different sources of variation: within country and sector and within firm (Tables B.8 and B.9 in the Online Appendix).<sup>15</sup> The estimated coefficients for this sub-sample generally have the same sign and significance level as those for the full sample of developing countries. The magnitudes of the coefficients, however, are often different, which reflects region-specific differences in the impact of e- government implementation. Importantly, for the number of visits by a tax official, the coefficient on ����3 increases in absolute value and becomes highly significant when firm fixed effects are taken into account. Similarly, for the likelihood to pay bribes to secure a government contract, the coefficient on ����3 is not positive or significant when firm fixed effects are taken into account, in contrast to the estimation with year, sector, and country fixed effects that had suggested e-procurement resulted in more corruption. These observations highlight the importance of controlling for firm fixed effects in firmlevel analysis, as they help to remove unobservable firm specific characteristics that can bias estimates. Unfortunately, the paucity of WBES data limits the cases in which firm fixed effects can be applied.

Finally, we confirm that in all cases we get similar results if we use OLS methods instead of tobit and probit. For firm-level analysis, we also confirm that the results remain qualitatively the same if we do not control for the labor productivity measure, which increases the sample size by 15 percent, and if we use a categorical measure of the tax administration obstacle instead of a binary variable.

# **5. Conclusion**

This paper is the first attempt to assess the impact of e-government adoption on public sector capacity cross-nationally. We exploit the new _Global e-Government Systems Database_ , developed by the World Bank, and the measures of tax compliance and public procurement competitiveness from the _Doing Business_ and _Enterprise Survey_ databases. Our results show that e-government can substantially improve government capacity, but the estimated effects vary by the type and functionality of e- government systems adopted, government activity and country context.

E-filing systems can significantly reduce the number of tax payments and the time required to prepare and pay taxes. They can also reduce the likelihood and frequency of visits by tax officials, thereby lowering tax compliance costs. Since these costs are frequently cited as a major impediment of the business climate, investments in e-filing can have potentially significant economic returns. However,

> 15 We estimate all regressions for the ECA region using OLS method.

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