Competition in Corruptible Markets

Abstract

Firms seeking business opportunities often face corruptible agents in many markets. This paper investigates the marketing strategy implications for firms competing for business, and for the buyer in a corruptible market. We consider a setting in which a buyer (a firm or government) seeks to purchase a good through a corruptible agent. Supplier firms that may or may not be a good fit compete to be selected by the agent. Only the agent observes whether a firm is a good fit. Corruption arises due to the agent’s incentive to select a non-deserving firm in exchange for bribes. Intuitively and as expected, a sufficiently large monitoring of the agent eradicates corruption. Interestingly, however, increasing the monitoring from an initial low level can backfire, making the agent more likely to select a non-deserving firm. This non-monotonic agent behavior makes it difficult for the buyer to reduce corruption. The implication is that the buyer should choose either to be ignorant or to take drastic measures to limit corruption. Further, we show that unilateral anti-corruption controls, such as the Foreign Corrupt Practices Act of 1977, on a U.S. firm seeking business in a corrupt foreign market can actually increase the firm’s profits.