Skip to main content

I Know What I Need: Optimization of Bribery

Abstract

Corruption has been a major obstacle to economic growth around the world. In this paper, we examine how firms interact with corrupt government officials either to minimize the impact of corruption on their operations or to maximize their benefit of paying a bribe. Our estimates show that firms know exactly what they need and use their limited resources to bribe only relevant government authorities. In other words, firms are rational bribers who know exactly what they need and optimize their bribes to fulfill that need. This type of intentional bribery could be reduced by enhanced institutional environments and improved openness of the economy.

This is a preview of subscription content, access via your institution.

Fig. 1

Notes

  1. Bribery firms often maintain a ‘double-book’ accounting system that consists of an official book for tax reporting purpose and an internal book for keeping track of bribes (Tran 2011). Bribe is often paid in cash, so engaging in bribery behaviors would directly reduce the available cash flow of the firm. For instance, if not being used to pay bribes, these cash could be used for additional investment. Tran (2011) provide a detailed account of corruption in procurement, including how rent is shared between the firm and corrupt officials, and how this could affect firms’ profit margins.

  2. Tran (2011) shows that bribe is common in obtaining government procurement. However, even after the contract is secured, the official in charge of payment may think she deserves a larger portion of the bribe and thus delay the payment in purpose. As a result, the bribing firm may have to pay extra bribe to ensure timely payment.

  3. The 22 countries are: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Serbia, Slovak Republic, Slovenia, and Ukraine.

  4. According to the Association of Certified Fraud Examiners (ACFE, www.acfe.com/fraud-examiner.aspx?id=4294994669), “judges or other court officials might accept bribes to exercise their influence over a case in a way that benefits the briber. For example, a judge might delay or accelerate cases, accept or deny appeals, or simply rule in a particular way in exchange for kickbacks”. They further provide two judicial corruption cases. The first one happened in June 2016, New York State Supreme Court Judge John A. Michaelek pleaded guilty to receiving bribes and offering a false instrument for filing in a court case involving a political operative named Steven Pigeon. Prosecutors alleged that Michaelek reached an understanding with Pigeon that the judge would engage in “official misconduct which advanced Pigeon’s interests.” As part of the arrangement, Pigeon helped relatives of Michaelek find employment and provided Michaelek with tickets to hockey games and a political fundraiser. The second one occurred in 2011, Munir Patel, a court clerk in the UK, became the first person to be imprisoned under the UK’s Bribery Act. Patel took bribes from motorists charged with traffic violations to help them avoid prosecution by using his privileged access to the court system. He actively solicited bribes by telling individuals that if they appeared in court, magistrates would be racially prejudiced against them. There are also academic papers that explicitly examine the cases of bribing court judges, i.e., Ayres (1996) and Pahis (2008).

  5. We measure the size of the firm using the number of employees instead of assets, because in our data there is no proper disclosure of firms’ assets. Having said that, the number of employees has been utilized as a measure of size in many studies. Calof (1994) reviewed 18 studies on firm size and export, 11 of them are using employees to capture the size of a firm. In another review, out of the 20 studies on firm size and corporate social responsibility, 6 of them also utilize employee as the measure (Orlitzky 2001). Thus the number of employees can be a proper measure of firm size.

  6. According to Khalil et al. (2015), external auditors are likely to suffer from the loss of reputation or sanctions following the discovery of bribery and financial misreporting. External auditors are also likely to suffer from financial losses in cases where they were sued by shareholders due to bribery and financial misreporting. In this case, external auditors named as defendants in lawsuits of bribery and financial misreporting need to invest a large amount of time and resources. They may also have to indemnify shareholders for their losses following the discovery of financial misreporting and bribery.

  7. As most of the firms in our sample are small-and-medium size firms (SMEs), they usually do not have a formal corporate board and a CEO like their larger counterparts. Therefore, in the survey, we are only able to capture the characteristics of the top manager, which could be the CEO for larger firms but for SMEs are more likely to be the manager or the owner of the firm.

  8. The Oster (2019) approach has been applied in a lot of top journal papers including: Collins and Wanamaker (2014), Mian and Sufi (2014), Andersen et al. (2016), Bhagwat et al. (2016), Cagé and Rueda (2016) Galor and Özak (2016), Gorodnichenko and Weber (2016), Smith (2016), Knüpfer et al. (2017), Satyanath et al. (2017), Gavazza et al. (2019), Heimer et al. (2019), and Tabellini (2020).

References

  • Ades, A., & Tella, R. D. (1997). National champions and corruption: Some unpleasant interventionist arithmetic. Economic Journal, 107, 1023–1042.

    Google Scholar 

  • Ades, A., & Tella, R. D. (1999). Rents, competition, and corruption. American Economic Review, 89, 982–993.

    Google Scholar 

  • Aldrich, H. (1976). Resource dependence and inter-organizational relations: Local employment service offices and social services sector organizations. Administration and Society, 7, 419–454.

    Google Scholar 

  • Altonji, J. G., Elder, T. E., & Taber, C. R. (2005). Selection on observed and unobserved variables: Assessing the effectiveness of Catholic schools. Journal of Political Economy, 113, 151–184.

    Google Scholar 

  • Andersen, T. B., Dalgaard, C. J., & Selaya, P. (2016). Climate and the emergence of global income differences. Review of Economic Studies, 83, 1334–1363.

    Google Scholar 

  • Ayres, I. (1996). The twin faces of judicial corruption: Extortion and bribery. Denver University Law Review, 74, 1231–1254.

    Google Scholar 

  • Beck, T., Degryse, H., De Haas, R., & Van Horen, N. (2018). When arms’ length is too far: Relationship banking over the business cycle. Journal of Financial Economics, 127, 174–196.

    Google Scholar 

  • Bhagwat, V., Dam, R., & Harford, J. (2016). The real effects of uncertainty on merger activity. Review of Financial Studies, 29, 3000–3034.

    Google Scholar 

  • Birhanu, A. G., Gambardella, A., & Valentini, G. (2016). Bribery and investment: Firm-level evidence from Africa and Latin America. Strategic Management Journal, 37, 1865–1877.

    Google Scholar 

  • Birhanu, A., Gambardella, A., & Valentini, G. (2013). Bribery and its firm-level outcomes in Africa and Latin America. Academy of Management Proceedings, 2013, 11035.

    Google Scholar 

  • Broadman, H. G., & Recanatini, F. (2001). Seeds of corruption: Do market institutions matter? MOST: Economic Policy in Transitional Economies, 11, 359–392.

    Google Scholar 

  • Brockman, P., Rui, O. M., & Zou, H. (2013). Institutions and the performance of politically connected M&As. Journal of International Business Studies, 44, 833–852.

    Google Scholar 

  • Cagé, J., & Rueda, V. (2016). The long-term effects of the printing press in Sub-Saharan Africa. American Economic Journal: Applied Economics, 8, 69–99.

    Google Scholar 

  • Calof, J. L. (1994). The relationship between firm size and export behavior revisited. Journal of International Business Studies, 25, 367–387.

    Google Scholar 

  • Casciaro, T., & Piskorski, M. J. (2005). Power imbalance, mutual dependence, and constraint, absorption: A close look at resource dependence theory. Administrative Science Quarterly, 50, 167–199.

    Google Scholar 

  • Charron, N. (2016). Do corruption measures have a perception problem? Assessing the relationship between experiences and perceptions of corruption among citizens and experts. European Political Science Review, 8, 147–171.

    Google Scholar 

  • Chen, Y., Liu, M., & Su, J. (2013). Greasing the wheels of bank lending: Evidence from private firms in China. Journal of Banking and Finance, 37, 2533–2545.

    Google Scholar 

  • Collins, W. J., & Wanamaker, M. H. (2014). Selection and economic gains in the great migration of African Americans: New evidence from linked census data. American Economic Journal: Applied Economics, 6, 220–252.

    Google Scholar 

  • Cullen, J. B., Parboteeah, K. P., & Hoegl, M. (2004). Cross-national differences in managers’ willingness to justify ethically suspect behaviors: A test of institutional anomie theory. Academy of Management Journal, 47, 411–421.

    Google Scholar 

  • Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117, 1–37.

    Google Scholar 

  • Farh, J., Tsui, A. S., Xin, K. R., & Cheng, B. (1998). The influence of relational demography and Guanxi: The Chinese case. Organization Science, 9, 471–488.

    Google Scholar 

  • Fisman, R., & Svensson, J. (2007). Are corruption and taxation really harmful to growth? Firm level evidence. Journal of Development Economics, 83, 63–75.

    Google Scholar 

  • Fungáčová, Z., Kochanova, A., & Weill, L. (2015). Does money buy credit? Firm-level evidence on bribery and bank debt. World Development, 68, 308–322.

    Google Scholar 

  • Galang, R. M. N. (2012). Victim or victimizer: Firm responses to government corruption. Journal of Management Studies, 49, 429–462.

    Google Scholar 

  • Galor, O., & Özak, Ö. (2016). The agricultural origins of time preference. American Economic Review, 106, 3064–3103.

    Google Scholar 

  • Gavazza, A., Nardotto, M., & Valletti, T. (2019). Internet and politics: Evidence from UK local elections and local government policies. Review of Economic Studies, 86, 2092–2135.

    Google Scholar 

  • Gaviria, A. (2002). Assessing the effects of corruption and crime on firm performance: Evidence from Latin America. Emerging Markets Review, 3, 245–268.

    Google Scholar 

  • Gerring, J., & Thacker, S. C. (2005). Do neoliberal policies deter political corruption? International Organization, 59, 233–254.

    Google Scholar 

  • Gorodnichenko, Y., & Weber, M. (2016). Are sticky prices costly? Evidence from the stock market. American Economic Review, 106, 165–199.

    Google Scholar 

  • Hakkala, K. N., Norbäck, P. J., & Svaleryd, H. (2008). Asymmetric effects of corruption on FDI: Evidence from Swedish multinational firms. Review of Economics and Statistics, 90, 627–642.

    Google Scholar 

  • Heimer, R. Z., Myrseth, K. O. R., & Schoenle, R. S. (2019). YOLO: Mortality beliefs and household finance puzzles. Journal of Finance, 74, 2957–2996.

    Google Scholar 

  • Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. (2000). Strategy in emerging economies. Academy of Management Journal, 43, 249–267.

    Google Scholar 

  • Hung, M., Kim, Y., & Li, S. (2018). Political connections and voluntary disclosure: Evidence from around the world. Journal of International Business Studies, 49, 272–302.

    Google Scholar 

  • Jacobs, D. (1974). Dependency and vulnerability: An exchange approach to the control of organizations. Administrative Science Quarterly, 19, 45–59.

    Google Scholar 

  • Jensen, N. M., Li, Q., & Rahman, A. (2010). Understanding corruption and firm responses in cross-national firm-level surveys. Journal of International Business Studies, 41, 1481–1504.

    Google Scholar 

  • Jeong, Y., & Weiner, R. J. (2012). Who bribes? Evidence from the United Nations’ Oil-for-Food Program. Strategic Management Journal, 33, 1363–1383.

    Google Scholar 

  • Khalil, S., Saffar, W., & Trabelsi, S. (2015). Disclosure standards, auditing infrastructure, and bribery mitigation. Journal of Business Ethics, 132, 379–399.

    Google Scholar 

  • Knüpfer, S., Rantapuska, E., & Sarvimäki, M. (2017). Formative experiences and portfolio choice: Evidence from the Finnish Great Depression. Journal of Finance, 72, 133–166.

    Google Scholar 

  • Kogut, B., & Kulatilaka, N. (1994). Operating flexibility, global manufacturing, and the option value of a multinational network. Management Science, 40, 123–139.

    Google Scholar 

  • Lambsdorff, J. G., & Cornelius, P. (2000). Corruption, foreign investment and growth. Africa Competitiveness Report, 2001, 70–78.

    Google Scholar 

  • Lapalombara, J. (1994). Structural and institutional aspects of corruption. Social Research, 61, 325–350.

    Google Scholar 

  • Lee, S. H., & Weng, D. H. (2013). Does bribery in the home country promote or dampen firm exports? Strategic Management Journal, 34, 1472–1487.

    Google Scholar 

  • Lee, S. H., Oh, K. E., & Eden, L. (2010). Why do firms bribe? Insights from residual control theory into firms’ exposure and vulnerability to corruption. Management International Review, 50, 775–796.

    Google Scholar 

  • Leff, N. H. (1964). Economic development through bureaucratic corruption. American Behavioral Scientist, 8, 8–14.

    Google Scholar 

  • Leys, C. (1965). What is the problem about corruption? Journal of Modern African Studies, 3, 215–230.

    Google Scholar 

  • Li, H., & Zhang, Y. (2007). The role of managers’ political networking and functional experience in new venture performance: Evidence from China’s transition economy. Strategic Management Journal, 28, 791–804.

    Google Scholar 

  • Martin, K. D., Cullen, J. B., Johnson, J. L., & Parboteeah, K. P. (2007). Deciding to bribe: A cross-level analysis of firm and home country influences on bribery activity. Academy of Management Journal, 50, 1401–1422.

    Google Scholar 

  • Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 110, 681–712.

    Google Scholar 

  • Merton, R. K. (1938). Social structure and anomie. American Sociological Review, 3, 672–682.

    Google Scholar 

  • Messner, S. F., & Rosenfeld, R. (1997). Political restraint of the market and levels of criminal homicide: A cross-national application of institutional-anomie theory. Social Forces, 75, 1393–1416.

    Google Scholar 

  • Meyer, J. W., & Scott, W. R. (1983). Organizational environments: Ritual and rationality. Beverly Hills, CA: Sage.

    Google Scholar 

  • Mian, A., & Sufi, A. (2014). What explains the 2007–2009 drop in employment? Econometrica, 82, 2197–2223.

    Google Scholar 

  • Mo, P. H. (2001). Corruption and economic growth. Journal of Comparative Economics, 29, 66–79.

    Google Scholar 

  • North, D. C. (1990). A transaction cost theory of politics. Journal of Theoretical Politics, 2, 355–367.

    Google Scholar 

  • Oliver, C. (1997). The influence of institutional and task environment relationships on organizational performance: The Canadian construction industry. Journal of Management Studies, 34, 99–124.

    Google Scholar 

  • Olken, B. A. (2009). Corruption perceptions vs. corruption reality. Journal of Public Economics, 93, 950–964.

    Google Scholar 

  • Olken, B. A., & Pande, R. (2012). Corruption in developing countries. Annual Review of Economics, 4, 479–509.

    Google Scholar 

  • Orchard, L., & Stretton, H. (1997). Public choice. Cambridge Journal of Economics, 21, 409–430.

    Google Scholar 

  • Orlitzky, M. (2001). Does firm size comfound the relationship between corporate social performance and firm financial performance? Journal of Business Ethics, 33, 167–180.

    Google Scholar 

  • Oster, E. (2019). Unobservable selection and coefficient stability: Theory and evidence. Journal of Business and Economic Statistics, 37, 187–204.

    Google Scholar 

  • Pahis, S. (2008). Corruption in our courts: What it looks like and where it is hidden. Yale Law Journal, 118, 1900–1944.

    Google Scholar 

  • Pearce, J. L., De Castro, J. O., & Guillén, M. F. (2008). Influencing politics and political systems: Political systems and corporate strategies. Academy of Management Review, 33, 493–495.

    Google Scholar 

  • Pellegrini, L., & Gerlagh, R. (2004). Corruption’s effect on growth and its transmission channels. Kyklos, 57, 429–456.

    Google Scholar 

  • Peng, M. W., & Luo, Y. (2000). Managerial ties and firm performance in a transition economy: The nature of a micro–macro link. Academy of Management Journal, 43, 486–501.

    Google Scholar 

  • Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations. New York: Harper and Row.

    Google Scholar 

  • Powpaka, S. (2002). Factors affecting manager’s decision to bribe: An empirical investigation. Journal of Business Ethics, 40, 227–246.

    Google Scholar 

  • Qi, S., & Ongena, S. (2019). Will money talk? Firm bribery and credit access. Financial Management, 48, 117–157.

    Google Scholar 

  • Rajan, R. G., & Zingales, L. (1998). Which capitalism? Lessons from the East Asian crisis. Journal of Applied Corporate Finance, 11, 40–48.

    Google Scholar 

  • Ramdani, D., & Van Witteloostuijn, A. (2012). The shareholder–manager relationship and its impact on the likelihood of firm bribery. Journal of Business Ethics, 108, 495–507.

    Google Scholar 

  • Rose-Ackerman, S. (2002). “Grand” corruption and the ethics of global business. Journal of Banking and Finance, 26, 1889–1918.

    Google Scholar 

  • Sachs, J., & Warner, A. (1995). Economic reform and the process of global integration. Brookings Paper on Economic Activity, 25, 1–118.

    Google Scholar 

  • Saha, B. (2001). Red tape, incentive bribe and the provision of subsidy. Journal of Development Economics, 65, 113–133.

    Google Scholar 

  • Sande, J. B., & Ghosh, M. (2018). Endogeneity in survey research. International Journal of Research in Marketing, 35, 185–204.

    Google Scholar 

  • Sandholtz, W., & Gray, M. M. (2003). International integration and national corruption. International Organization, 57, 761–800.

    Google Scholar 

  • Satyanath, S., Voigtländer, N., & Voth, H. J. (2017). Bowling for fascism: Social capital and the rise of the Nazi Party. Journal of Political Economy, 125, 478–526.

    Google Scholar 

  • Scott, W. R. (1998). Organizations: Rational, natural and open systems. Englewood Cliffs, NJ: Prentice Hall.

    Google Scholar 

  • Shaheer, N., Yi, J., Li, S., & Chen, L. (2019). State-owned enterprises as bribe payers: The role of institutional environment. Journal of Business Ethics, 159, 221–238.

    Google Scholar 

  • Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics, 108, 599–617.

    Google Scholar 

  • Sikka, P., & Lehman, G. (2015). The supply-side of corruption and limits to preventing corruption within government procurement and constructing ethical subjects. Critical Perspectives on Accounting, 28, 62–70.

    Google Scholar 

  • Smith, J. D. (2016). US political corruption and firm financial policies. Journal of Financial Economics, 121, 350–367.

    Google Scholar 

  • Sung, H., & Chu, D. (2003). Does participation in the global economy reduce political corruption? An empirical inquiry. International Journal of Comparative Criminology, 41, 179–193.

    Google Scholar 

  • Svensson, J. (2003). Who must pay bribes and how much? Evidence from a cross section of firms. Quarterly Journal of Economics, 111, 204–240.

    Google Scholar 

  • Svensson, J. (2005). Eight questions about corruption. Journal of Economic Perspectives, 19, 19–42.

    Google Scholar 

  • Tabellini, M. (2020). Gifts of the immigrants, woes of the natives: Lessons from the age of mass migration. Review of Economic Studies, 87, 454–486.

    Google Scholar 

  • Tran, A. (2011). Which regulations reduce corruption? Evidence from the internal records of a bribe-paying firm. Working Paper.

  • Treisman, D. (2000). The causes of corruption: A cross-national study. Journal of Public Economics, 76, 399–457.

    Google Scholar 

  • Wei, S. J. (2000). How taxing is corruption on international investors? Review of Economics and Statistics, 82, 1–11.

    Google Scholar 

  • Wellalage, N. H., Locke, S., & Samujh, H. (2019). Corruption, gender and credit constraints: Evidence from South Asian SMEs. Journal of Business Ethics, 1, 267–280.

    Google Scholar 

  • Wu, X. (2009). Determinants of bribery in Asian firms: Evidence from the World Business Environment Survey. Journal of Business Ethics, 87, 75–88.

    Google Scholar 

  • Zhou, X., Han, Y., & Wang, R. (2013). An empirical investigation on firms’ proactive and passive motivation for bribery in China. Journal of Business Ethics, 118, 461–472.

    Google Scholar 

Download references

Acknowledgements

The authors thank Editor Adrian Keevil and two anonymous reviewers for their valuable suggestions. Yu Yan acknowledge financial support from the Postdoctoral Research Foundation of China (2020M671931). Shusen Qi acknowledges financial support from the National Natural Science Foundation of China (71903164, 71790601) and Social Science Foundation of Fujian Province (FJ2019B140).

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Shusen Qi.

Ethics declarations

Conflict of interest

The authors declare that they have no conflict of interest.

Ethical Approval

The authors declare that they have complied with ethical standards.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 11, 12 and 13.

Table 11 Cross-country and within country variation
Table 12 Using selection on observables to assess bias from omitted variables
Table 13 Countries with political power turnovers in the past 4 years

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Yan, Y., Qi, S. I Know What I Need: Optimization of Bribery. J Bus Ethics 174, 311–332 (2021). https://doi.org/10.1007/s10551-020-04608-z

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-020-04608-z

Keywords

  • Bribery
  • Cause of corruption
  • Intentional bribery