Abstract
This paper empirically examines the demand and supply sides of bribery using World Bank Enterprise Survey data on 18,005 firms in more than 75 developing countries. It assesses the determinants of firms’ bribe paying behavior and examine how bribe behavior affects two main sectors where corruption is rampant: taxation and government contracts. The paper shows that corruption in tax administration tends to be mainly a demand-side phenomenon. Paying a bribe requested by a public official is associated with a 16 percent increase in the share of sales not reported for tax purposes. In public procurement, the results suggest on the contrary that corruption is a supply-side phenomenon, with bribe transactions generally initiated by firms to secure public contracts. Firms supplying a bribe without a previous request by officials is associated with a 17 percent increase in the bribe paid to secure a government contract, more than three times the effect observed on the demand side of bribery.
Highlights
Corruption exists everywhere, in the private and public sectors, in wealthy and in poor countries, but takes root especially in countries with weak incentives and poor monitoring, transparency and accountability of public agents
Our results suggest on the contrary that corruption tends to be mainly a supply-side phenomenon, with bribe transactions generally initiated by firms in order to secure public contracts
Firms acquiescing to a bribe request by public officials are associated with increases in sales not reported for tax purposes of more than 16%
Summary
Corruption exists everywhere, in the private and public sectors, in wealthy and in poor countries, but takes root especially in countries with weak incentives and poor monitoring, transparency and accountability of public agents. While some firms or individuals could be seen as innocent victims of corrupt officials, forced to make payoffs to pursue their legitimate activities, considering the problem only from the receiving end of the graft transaction – the demand side – does not present a complete view of the problem. Since both parties in a bribery transaction (giver and taker) can gain from the transaction, bribery deals could often be initiated from the supply side, the party who gives the bribe. Some local firms or large multinationals will make proposals which "officials in poor countries will find hard to resist" (Myint, 2000, p. 33). These two distinct sides of corruption transactions and firms’ behavior have been recognized in the OECD Anti-Bribery Convention which refers to as "active bribery" the act of offering, promising or giving a bribe to a public official to obtain a trading advantage, and "passive bribery" the act of complying with a demand for a bribe to avoid being excluded from trade (refer as a "facilitation payment" by international legislations)
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