Monopoly Rents, Institutions, and Bribery

Abstract

Why do some firms pay more bribes than others? We extend the literature by examining the role of one crucial, but overlooked industry characteristic---fixed asset intensity---in shaping firms' bribe payments. High fixed asset intensity creates natural entry barriers, thereby leading to market concentration and opportunities for monopoly rent extraction. High rents, in turn, increase the value of government officials' ``control rights'' and thus their incentive to engage in predatory behavior. Firms in fixed-asset intensive industries therefore have strong incentives to pay bribes in exchange for de facto property rights. We further posit that strong legal institutions weaken this quid pro quo by providing security for property rights and increasing the risk for government officials' behaving corruptly. We find empirical support for our arguments based on data from a large firm survey in China. Our findings have important implications for governance and industrial regulations in developing countries.

Keywords: Fixed Asset Intensity, Market Concentration, Monopoly Rents, Corruption, Legal Institutions, China