Abstract
Using data from a lab experiment carried out in Kenya, we show that while “legitimate” costs and costs imposed by corruption both deter investment, the latter is no more of a disincentive than the former. We interpret the evidence as consistent with the conclusion that our participants viewed corruption as just another cost of doing business. We also experimented with giving participants in some treatments information about the corruption expectations of participants in previous sessions and the actual extent of corruption in previous sessions. We find some evidence that the objective information actually increased investment without changing the participants’ own expectations regarding corruption. That result is compatible with the idea that revealing the level of corruption changes the descriptive norm and facilitates investment in a corrupt environment.
Highlights
Understanding the factors that underlie individual economic decision-making is a question of fundamental importance for firms, governments, and society in general
We learn that firms from both developing and developed countries are active participants in corruption
In many instances, such failures of “compliance” arise when agents of multinationals are operating in countries where corruption is endemic
Summary
Understanding the factors that underlie individual economic decision-making is a question of fundamental importance for firms, governments, and society in general. Micro level evidence supports the same conclusion by finding that individuals having experience living with corrupt leaders tend to invest less (Beekman et al, 2013, 2014). While a signal based on the subjective expectations of others has no statistically significant effect, we report some evidence suggesting that providing information on corruption experiences gleaned from earlier treatments increases investment. We contribute to the experimental literature on corruption in general by |introducing a design wherein the amounts embezzled has a direct bearing on the returns to investment. We outline our experimental design and describe the characteristics of our participants before presenting our results and discussing their limitations and implications
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