Is Corruption Distasteful or Just Another Cost of Business?

Abstract

The question of why firms and managers engage in corruption and related unethical behaviors has attracted significant academic attention with several authors pointing to the importance of social norms and expectations. In this paper, we ask if “legitimate” administrative costs are less of a disincentive to investment than costs that arise due to corruption? To answer this, we carried out a framed laboratory experiment in Nairobi, Kenya. The results suggest that our participants viewed corruption as just another cost of doing business. Relative to a treatment with no costs, the negative effect on investment of a treatment which featured the possibility of corruption was statistically indistinguishable from that of a treatment with “legitimate” administrative costs. We also experimented with giving participants in some treatments signals regarding the actual extent of corruption and participant expectations thereof in previous sessions. We find some evidence that the objective information actually increased investment without changing the participants’ own expectations regarding corruption. This finding of a reassurance effect of information provision has implications for the behavior of agents in a corrupt environment.

Keywords: Corruption; Investment; Experimental Economics

JEL Classification: C91; D73; D81