Does Grease Money Speed Up the Wheels of Commerce?

Abstract:     
Is it true that bribery can alleviate red tape for enterprises? Not if bureaucrats can choose the regulatory burden and the red tape delay to extract bribes. The authors' empirical test finds that firms using bribes waste more management time dealing with bureaucrats. The business community can benefit from laws and collective initiatives strengthening its ability to say no to bribery.

If bureaucratic burden and delay are exogenous, a firm may find bribes a helpful way to cut through red tape. Indeed, according to the efficient grease hypothesis, corruption can improve economic efficiency, and fighting bribery can be counterproductive.

This need not be the case.

In a general equilibrium in which regulatory burden and delay can be endogenously chosen by rent-seeking bureaucrats, the effective (not just nominal) red tape and bribery may be positively correlated across firms.

Using data from three worldwide firm-level surveys covering thousands of enterprises, Kaufmann and Wei examine the relationship of bribe payments, management time wasted with bureaucrats, and cost of capital. They find that firms that pay more in bribes are also likely to spend more, not less, management time with bureaucrats, negotiating regulations. Firms that bribe also face a higher, not lower, cost of capital.

While the international survey data used in the study have some clear advantages, they do not elicit hard numbers from respondents but rather qualitative ratings in an index. The results remain robust, however, even after the authors control for perception bias.

The study has important policy implications: the business community as a whole can benefit from international laws that strengthen the ability of firms to credibly commit to no bribery even if an individual firm may find it otherwise optimal to bribe in a corrupt environment.

This paper - a joint product of Public Economics, Development Research Group, and Governance, Regulation, and Finance, World Bank Institute - is part of a larger effort in the Bank to understand the effects of corruption on economic development, as well as part of a major empirical effort to gather and analyze data on governance (for further details, visit http://www.worldbank.org/wbi/gac). The authors may be contacted at [e-mail] or [e-mail].

Number of Pages in PDF File: 20

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