Eat, Drink, Firms and Government: An Investigation of Corruption from Entertainment Expenditures of Chinese Firms

46 Pages Posted: 26 Sep 2004

See all articles by Hongbin Cai

Hongbin Cai

Peking University - Guanghua School of Management

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Lixin Colin Xu

World Bank - Development Research Group (DECRG); World Bank - Development Research Group (DECRG)

Date Written: August 2004

Abstract

Entertainment and Travel Costs (ETC), an expenditure item in standard accounting books of firms in China, amount to about 20% of total wage bills in a sample of 3470 Chinese firms. Using a detailed dataset of these firms, we analyze the composition of ETC and effects of ETC on firm performance. We develop a simple model of managerial decisions on the amount of entertainment expenditures to spend on strengthening relational capital with suppliers and clients, bribing government officials, and private consumption. This model allows us to identify components of ETC by examining how they should respond to different environmental variables. We find strong evidence that firms' ETC compromise a mix that includes expenditures on government officials both as "grease money" and "protection money," expenditures to build relational capital with suppliers and clients, and managerial private consumption. Overall, ETC have significantly negative effects on firm performance, but their negative effects can be much less pronounced when their marginal returns are higher, particularly, under severe government expropriation and when the quality of government service is very poor.

Keywords: Corruption, Firm performance, Government Expropriation, Corporate Governance

JEL Classification: L2, O1, H2

Suggested Citation

Cai, Hongbin and Fang, Hanming and Xu, Lixin Colin and Xu, Lixin Colin, Eat, Drink, Firms and Government: An Investigation of Corruption from Entertainment Expenditures of Chinese Firms (August 2004). Available at SSRN: https://ssrn.com/abstract=594961 or http://dx.doi.org/10.2139/ssrn.594961

Hongbin Cai

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Hanming Fang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lixin Colin Xu (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H Street NW
MSN3-311
Washington, DC 20433
United States

World Bank - Development Research Group (DECRG) ( email )

1818 H Street NW
MSN3-311
Washington, DC 20433
United States

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