Association for Public Policy Analysis & Management

Corruption, the misuse of public office for private gain, is estimated to cost 2.6 trillion US dollars a year globally. With such a high cost, the determinants of corruption are not yet well understood given its illicit nature. In this paper, I examine whether firm performance affects corruption. More specifically, I examine whether the change in firm profitability is one of the determinants of firm corruption/bribes demanded by government officials. I measure changes in firm profitability using exogenous shocks to the price of the good sold by the firm. So I use variation in the price faced by each firm depending on which industry the firm belongs to. I test for the above mechanism using pooled cross sectional data from the world bank enterprise survey (WBES). The WBES data that I use is on 135 developing and low income developed countries, for the years 2005 to 2018. Using exogenous variation in the price faced by each firm depending on which industry it is in, I first test estimate the impact of changes in the international price on firm performance profitability. Differences in profitability across industries is induced by different responses of different industries to the international price. I then test for whether changes in profitability affect corruption, The results indicate that there exists an association between firm profitability and corruption. The association is positive; the more profits that firms make, the higher the percentage of sales that the firms have to pay as bribes to government officials.