I Know What I Need: Optimization of Bribery

Bribery firms often maintain a ‘double-book’ accounting system that consists of an official book for tax reporting purpose and an internal book for keeping track of bribes (Tran 2011). Bribe is often paid in cash, so engaging in bribery behaviors would directly reduce the available cash flow of the firm. For instance, if not being used to pay bribes, these cash could be used for additional investment. Tran (2011) provide a detailed account of corruption in procurement, including how rent is shared between the firm and corrupt officials, and how this could affect firms’ profit margins.

Tran (2011) shows that bribe is common in obtaining government procurement. However, even after the contract is secured, the official in charge of payment may think she deserves a larger portion of the bribe and thus delay the payment in purpose. As a result, the bribing firm may have to pay extra bribe to ensure timely payment.

The 22 countries are: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Serbia, Slovak Republic, Slovenia, and Ukraine.

According to the Association of Certified Fraud Examiners (ACFE, www.​acfe.​com/​fraud-examiner.​aspx?​id=​4294994669), “judges or other court officials might accept bribes to exercise their influence over a case in a way that benefits the briber. For example, a judge might delay or accelerate cases, accept or deny appeals, or simply rule in a particular way in exchange for kickbacks”. They further provide two judicial corruption cases. The first one happened in June 2016, New York State Supreme Court Judge John A. Michaelek pleaded guilty to receiving bribes and offering a false instrument for filing in a court case involving a political operative named Steven Pigeon. Prosecutors alleged that Michaelek reached an understanding with Pigeon that the judge would engage in “official misconduct which advanced Pigeon’s interests.” As part of the arrangement, Pigeon helped relatives of Michaelek find employment and provided Michaelek with tickets to hockey games and a political fundraiser. The second one occurred in 2011, Munir Patel, a court clerk in the UK, became the first person to be imprisoned under the UK’s Bribery Act. Patel took bribes from motorists charged with traffic violations to help them avoid prosecution by using his privileged access to the court system. He actively solicited bribes by telling individuals that if they appeared in court, magistrates would be racially prejudiced against them. There are also academic papers that explicitly examine the cases of bribing court judges, i.e., Ayres (1996) and Pahis (2008).

We measure the size of the firm using the number of employees instead of assets, because in our data there is no proper disclosure of firms’ assets. Having said that, the number of employees has been utilized as a measure of size in many studies. Calof (1994) reviewed 18 studies on firm size and export, 11 of them are using employees to capture the size of a firm. In another review, out of the 20 studies on firm size and corporate social responsibility, 6 of them also utilize employee as the measure (Orlitzky 2001). Thus the number of employees can be a proper measure of firm size.

According to Khalil et al. (2015), external auditors are likely to suffer from the loss of reputation or sanctions following the discovery of bribery and financial misreporting. External auditors are also likely to suffer from financial losses in cases where they were sued by shareholders due to bribery and financial misreporting. In this case, external auditors named as defendants in lawsuits of bribery and financial misreporting need to invest a large amount of time and resources. They may also have to indemnify shareholders for their losses following the discovery of financial misreporting and bribery.

As most of the firms in our sample are small-and-medium size firms (SMEs), they usually do not have a formal corporate board and a CEO like their larger counterparts. Therefore, in the survey, we are only able to capture the characteristics of the top manager, which could be the CEO for larger firms but for SMEs are more likely to be the manager or the owner of the firm.

The Oster (2019) approach has been applied in a lot of top journal papers including: Collins and Wanamaker (2014), Mian and Sufi (2014), Andersen et al. (2016), Bhagwat et al. (2016), Cagé and Rueda (2016) Galor and Özak (2016), Gorodnichenko and Weber (2016), Smith (2016), Knüpfer et al. (2017), Satyanath et al. (2017), Gavazza et al. (2019), Heimer et al. (2019), and Tabellini (2020).