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Economics of Governance
Published in: Economics of Governance 4/2013

01-11-2013 | Original Paper

Who bribes in public contracting and why: worldwide evidence from firms

Authors: Anna D’Souza, Daniel Kaufmann

Published in: Economics of Governance | Issue 4/2013

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Abstract

We study procurement bribery utilizing survey data from 11,000 enterprises in 125 countries. About one-third of managers report that firms like theirs bribe to secure a public contract, paying about 8 % of the contract value. Econometric estimations suggest that national governance factors, such as democratic accountability, press freedom, and rule of law, are associated with lower bribery. Larger and foreign-owned firms are less likely to bribe than smaller domestic ones. But among bribers, foreign and domestic firms pay similar amounts. Multinational firms appear sensitive to reputational risks in their home countries, but partially adapt to their host country environments.
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Appendix
Available only for authorised users
Footnotes
1
The Size of Government Procurement Markets (2002, p. 8). Estimates are from 1997 and 1998.
 
2
Size of Public Procurement Market (2011, p. 148). Percentage of GDP estimates are from 2008. Authors’ calculation of dollar amount is based on 2012 GDP for OECD member states, available at http://​stats.​oecd.​org.
 
3
The survey data were generously provided by the World Economic Forum from their Executive Opinion Survey 2006.
 
4
Demand-driven governance is a term often used by international donor agencies to describe the institutions of, and initiatives for, accountability and transparency originating outside of the public sector, i.e., driven by citizens, civil society, and the private sector. By contrast, supply-driven governance refers to those institutions and initiatives led by the government.
 
5
The OECD Convention created large penalties for firms and individuals caught bribing a foreign public official. Until the advent of the OECD Convention, bribing a foreign public official was only illegal for US firms (following the 1977 Foreign Corrupt Practices Act). In all countries, bribing a domestic public official had been illegal for some time.
 
6
Firm attributes are taken as exogenous.
 
7
About 11.2 % of firms are missing responses to the bribe fee question. This percentage of missing responses is comparable to that of other questions dealing with percentages, such as a question on the overall tax burden as a percentage of net revenues. About 35 % of managers choose the ‘do not know/ NA’ response. This may reflect those firms that do not engage in contracts with the government, but it may also contain some responses from managers who want to conceal bribery or who simply do not know if bribes are being paid within the firm.
 
8
10,424 firms have complete information on firm size and industry; the 808 missing this information are missing responses to most survey questions. Neither firm size nor industry (where available) is systematically related to the propensity to respond to the procurement bribery questions.
 
9
Number of employees: less than or equal to 50; 51–100; 101–500; 501–1,000; 1,001–5,000; 5,001–20,000; 20,001–100,000; more than 100,000.
 
10
We also include a dummy for government ownership (denoting a minimum 10 % public ownership share), which is included to identify correctly the coefficients related to foreign ownership.
 
11
Due to high correlation among the national governance measures, we include each separately. We also include permutations of two governance variables simultaneously; the coefficients remain largely significant (not reported).
 
12
We also use an ordered probit model since the bribe fee paid variable is categorical; the results are qualitatively similar and so we present the OLS results for ease of interpretation.
 
13
An important caveat to these results is that in countries with well-developed institutions and strong systems of governance, firms may have legal alternatives to bribery, i.e., “legal corruption” such as legal lobbying and influencing public policy as described by Kaufmann and Vicente (2011). While this caveat does not detract from the evidence we find on illegal bribery, it places the results in context and underscores the fact that procurement bribery is but one among a number of important dimensions of corruption.
 
14
In some regressions, the effects for the largest firms (over 20,000 employees) are not significant; this may simply be due to the small number of observations in this category.
 
15
A caveat to these results is that large firms may be more likely to underreport bribery since they have more to lose—in terms of assets and reputation—than do small firms. Also a firm may underreport bribery if the respondent is unaware of bribes being paid within the firm, which is more likely in a large firm. Such underreporting could be driving partially the coefficients on firm size.
 
16
As with large firms, foreign firms may be more likely to underreport bribes paid since they have more to lose.
 
17
Results are robust to the use of different cut-offs for foreign classification, e.g., 50 %.
 
18
Since a multinational firm operating abroad would factor both the home and host country conditions in its calculus, one would expect that its propensity to bribe abroad would be different than its propensity to bribe at home. Insofar as governance conditions are stricter, on average, in OECD countries than in developing countries, multinationals based in OECD countries would be expected to bribe more frequently when operating abroad. That is, the same firm would at least in part adapt its behavior to the local environment.
 
19
It is possible, however, that the results suffer from downward bias due to clustering of observations in the multinational firm sample around home countries with satisfactory rule of law. That is, we may fail to find an effect because there is not enough variation in the home country indicators within the sample of firms that are headquartered abroad. In the literature, Wei (2000) finds that foreign direct investment is negatively associated with national levels of corruption. While the EOS sample is not representative, there is evidence that multinational firms operate in countries with varying levels of good governance.
Table 10
Bribery incidence results for firms headquartered abroad only with home country characteristics
 
(1)
(2)
(3)
(4)
(5)
(6)
Transparency
\(-\)0.0616***
     
[0.0201]
     
Free press
 
\(-\)0.152***
    
 
[0.0454]
    
Partly free press
 
\(-\)0.0827**
    
 
[0.0394]
    
Rule of law
  
\(-\)0.0498***
   
  
[0.0136]
   
Competition
   
\(-\)0.0654***
  
   
[0.0147]
  
Voice and accountability
    
\(-\)0.0577***
 
    
[0.0167]
 
Government effectiveness
     
\(-\)0.0550***
     
[0.0137]
HQ transparency
\(-\)0.0505**
     
[0.0241]
     
HQ free press
 
\(-\)0.073
    
 
[0.0873]
    
HQ partly free press
 
0.043
    
 
[0.0904]
    
HQ rule of law
  
\(-\)0.002
   
  
[0.0225]
   
HQ competition
   
\(-\)0.030
  
   
[0.0268]
  
HQ voice and accountability
    
\(-\)0.043
 
    
[0.0271]
 
HQ government effectiveness
     
\(-\)0.005
     
[0.0223]
Subsidiary HQ abroad in OECD
\(-\)0.038
\(-\)0.0887**
\(-\)0.116**
\(-\)0.070
\(-\)0.066
\(-\)0.103**
[0.0436]
[0.0401]
[0.0528]
[0.0452]
[0.0438]
[0.0452]
Observations
1,350
1,350
1,350
1,350
1,350
1,350
Log-likelihood
\(-\)566.4
\(-\)565.1
\(-\)567.7
\(-\)562.8
\(-\)565.4
\(-\)566.4
PseudoR2
0.064
0.066
0.062
0.070
0.065
0.064
Sample includes firms that are HQ abroad only. Marginal effects from Probit regressions are evaluated at the sample means. Each column represents a separate regression. Robust standard errors—in brackets—are clustered by country. The dependent variable is an indicator for bribes paid. All regressions include firm size dummies, industry dummies, and a dummy for government ownership
*, **, and *** denote significance at 10, 5, and 1 %, respectively
 
20
With panel data, we would be able to control for time-invariant unobservable firm characteristics that could be correlated with the variables of interest; with cross-sectional data, we cannot completely control for such factors.
 
21
A Yiddish word that is now part of the English vocabulary and that means ‘incessant griping or complaining’. Some types of firms, and/or respondents from certain countries, may have a more negative view in reporting about the same constraint or issue than others. See Kaufmann and Wei (1999) for use of ‘kvetch’ variables as controls in econometric estimations with firm-level data.
 
22
See Kaufmann and Kraay (2002) for evidence of the causal effect of governance on incomes. Also, see Acemoglu et al. (2001), Rodrik et al. (2004) and Rigobon and Rodrik (2005) for evidence of the role of institutions in explaining economic development.
 
23
Twelve out of 125 countries are missing from the Barro and Lee dataset; thus 842 observations are dropped in these regressions.
 
24
The other exceptions are in the bribe fee regressions when either competition or government effectiveness are included.
 
25
Question on press freedom: “In your country, can the media publish/broadcast stories of their choosing without fear of censorship or retaliation? [1: no] to [7: yes—whatever they want]”. Question on information: “Are firms in your country usually informed clearly by the government on changes in policies and regulations affecting your industry? [1: never informed] to [7: always informed]”.
 
26
Also log GDP can be seen as a proxy for contract size. Therefore the results are also consistent with a firm-level story of contract size being a determinant of bribery. In particular, we would expect more bribery to occur in larger projects where it may be more difficult to detect bribery and potential rents may be greater.
 
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Metadata
Title
Who bribes in public contracting and why: worldwide evidence from firms
Authors
Anna D’Souza
Daniel Kaufmann
Publication date
01-11-2013
Publisher
Springer Berlin Heidelberg
Published in
Economics of Governance / Issue 4/2013
Print ISSN: 1435-6104
Electronic ISSN: 1435-8131
DOI
https://doi.org/10.1007/s10101-013-0130-5

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