Why Do Firms Bribe?

Abstract

This study answers the questions of why firms bribe government officials and why some firms pay higher bribes than other firms. Using insights from residual control theory, we examine how governments exercise residual rights of control through regulation or state ownership of firms, and how these rights affect the payment and size of bribes by firms. We argue that firms vary in their exposure and vulnerability to residual rights of control by government officials, depending on the firms’ characteristics and circumstances. Differences in firms’ exposure and vulnerability to corruption affect their threat point (i.e. ability to walk away) and thus affect which firms pay bribes and bribe size. Our results show that, at the firm level, bribe size depends on how much a government can exercise residual rights of control and the firm’s threat point. At the same time, at the country level, the type of corruption matters; pervasive corruption is positively related, while arbitrary corruption is negatively related, to bribes paid.