The Impact of Bribery Relationships on Firm Growth in Transition Economies

Abstract

This study explores how bribery affects firm growth by focusing on the asymmetric dependence of firms on government resources and services. We conceptualize bribery as relationships through which bribery requests require firms to frequently interact with rent-seeking government officials. Through bribery relationships, such officials extort firms beyond the exchange of bribe money for preferential treatment, depriving acquiescing firms of time and effort and thereby imposing hidden costs that could be otherwise used for firm growth. We find that bribery relationships damage firm growth. Firm status such as introducing new products or not affects how rent-seeking government officials check on firms and calculate their extortion schemes in bribery relationships; bribery relationships damage firm growth more significantly for firms without new products. The damage of bribery relationships to firm growth is also contingent on institutional environments. Under pervasive corruption, firms in bribery relationships may increase their acquiescence to the extortion of rent-seeking government officials. In countries with high-quality governance, however, firms can depend on sound regulations and rules of law and government officials experience high moral costs of corruption. Thus, the negative effect of the bribery relationship on firm growth will be strengthened under pervasive corruption and weakened under high-quality governance. Using Business Environment and Enterprise Performance Survey and World Governance Indicators data for 28 Eastern European countries from 2002–2014, we demonstrate the multifaceted features of the bribery relationship and its interaction with country-level institutional environments. Supplemental Material: The online appendices are available at https://doi.org/10.1287/orsc.2022.1575 .