Extortion or cost-reduction: Why do firms pay bribes?

Abstract

Do firms bribe government officials to reduce their costs or do bribe payments arise because of extortion from government officials? Using three of the Business Environment and Enterprise Performance surveys of firms across several countries and employing various estimation methodologies, this paper considers how bribery is associated with the potential for the firm to find honest government officials. If firms that report greater opportunities to find honest officials pay lower bribes, then this is a sign that bribes come from extortion because the presence of such officials should not matter for firms wanting to pay bribes to reduce costs. I generally find evidence that bribes arise due to extortion although results somewhat weaken in the latest survey.