Who Bribes in Public Contracting and Why: Worldwide Evidence from Firms

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Who Bribes in Public Contracting and Why: Worldwide Evidence from Firms

Utilizing data from an enterprise survey of over 11,000 firms operating in 125 countries, and building on a profit maximizing cost-benefit framework driving a firm’s bribery decision, we study the determinants of bribery in public procurement contracting. The data suggest that about one-third of firms bribe in order to secure public contracts, and that these firms pay an average of 7.9% of the contract value in bribes. The likelihood of bribing is higher in low income countries (50%), yet in industrialized OECD countries bribery does take place among a substantial minority (14%) of firms.

Econometric estimations suggest that the demand side of good governance (voice and democratic accountability, press freedom, transparency) and the supply-side (rule of law, government effectiveness), along with competition, reduce both the incidence and magnitude (fee) of procurement bribery by the firm. Multinational firms appear to partially adapt to their host country governance environment, bribing more often in medium- and low-income countries (at 20%) than in OECD countries (at 11%). Yet multinationals do not fully ‘adapt’ and thus do not behave exactly like the domestic firms in the host country (at 36%); transnational firms appear more sensitive to reputational costs in their home country and internationally as well.

Firms that are larger and foreign-owned are less likely to bribe than smaller domestic firms, yet among bribers, foreign and domestic firms pay similar bribe fees. This suggests that reputational risks - which weigh on the decision to bribe, not on the amount - play an important role. The results are consistent with the firm’s profit-maximizing framework and have implications for policy, namely in efforts to raise the cost and lower the benefits of bribing (e.g. detection and public disclosure of firms that bribe). The results also cast doubt on conventional initiatives that do not affect the profit function (such as voluntary codes of conduct).