Does "Grease Money" Speed Up the Wheels of Commerce?

29 Pages Posted: 19 May 1999 Last revised: 30 Nov 2001

See all articles by Daniel Kaufmann

Daniel Kaufmann

Natural Resource Governance Institute (NRGI); The Brookings Institution

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 1999

Abstract

In an environment in which bureaucratic burden and delay are exogenous, an individual firm may find bribes helpful to reduce the effective red tape it faces. The efficient grease' hypothesis asserts therefore that corruption can improve economic efficiency and that fighting bribery would be counter-productive. 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, we examine the relationship between bribe payment, management time wasted with bureaucrats, and cost of capital. Contrary to the efficient grease' theory, we find that firms that pay more bribes are also likely to spend more, not less, management time with bureaucrats negotiating regulations, and face higher, not lower, cost of capital.

Suggested Citation

Kaufmann, Daniel and Wei, Shang-Jin, Does "Grease Money" Speed Up the Wheels of Commerce? (April 1999). NBER Working Paper No. w7093. Available at SSRN: https://ssrn.com/abstract=162974

Daniel Kaufmann

Natural Resource Governance Institute (NRGI) ( email )

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New York, NY 10004
United States

HOME PAGE: http://www.resourcegovernance.org

The Brookings Institution ( email )

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Washington, DC 20036
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HOME PAGE: http://www.brookings.edu/experts/kaufmannd

Shang-Jin Wei (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

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Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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