How does bribery affect the wage performance of formal firms? Instrumental variables and matching evidence from Nigeria

Abstract

Background: There is an ongoing debate about the effects of bribery on economic performance, where strong arguments are made on the opposing sides. This article investigates the relationship between bribery and the level of workers’ wages. The study is a variant of investigations into firms’ compression of wages to pay for staff management mutually beneficial business practices. Aim: The aim of this study is to estimate the impact of bribery on the wage performance of formal firms. Setting: The empirical assessment uses a unique firm-level data set comprising 1141 Nigerian manufacturing firms, some of whom paid bribes to corrupt bureaucrats. Methods: The study utilised a standard ordinary least-squares estimation technique. To address the potential endogeneity and measurement error bias arising from bribery, we used industry-location average bribe rate as instrument. Results: We find a significant negative effect of bribery on wages to the extent that a one percentage point increase in the rate of bribery reduces the level of wages paid to the workers by about 230 000 naira per worker per annum. A robustness check using the counterfactual evaluation framework of propensity score matching, supports the ordinary least-squares estimation. Conclusion: This study lends support to the firm level-based hypothesis that bribery has a detrimental long-term effect on firm performance. In particular, that employers using their monopsony power shift the burden of bribery to the workers through compressing wages. In addition, our results justify the enormous attention of the international community in combating bribery and corruption in Nigeria and other developing countries.