Production, infrastructure, bribery decisions, and corruption control

Purpose - The purpose of this paper is to study the reasons and decision-making processes of heterogeneous firms’ bribery behavior, and how they will affect an aggregate economy’s development and corruption status. Design/methodology/approach - The authors build a dynamic model to study a firm’s joint decision to bribe and invest, and how the decision is determined by its production and infrastructure status. The authors simulate the firm-level decision and development paths, and then build an aggregate economy consisting of heterogeneous firms. The authors then also simulate the development and corruption growth paths of the economy, by calibrating the model according to Chinese manufacturing firms in 2012. Findings - Following the simulation results, the authors conduct counterfactual policy analyses. By comparing between the simulation results of two different counterfactual scenarios, the authors study how a government could control bribing better – as to decrease the number of bribers, and the average amount of the bribery payments. It is found that directly raising the bribery costs works more efficiently in controlling corruption, compared with reducing the benefits received by the bribers. The finding provides insightful policy implications for the government to clear up its economy. Originality/value - The paper makes a novel and unique contribution to the literature by filling the current theoretical gap. The authors introduce a dynamic firm-level model to interpret firms’ bribery decisions and replicate the aggregate stylized facts. The paper innovatively treats bribery as both discrete and continuous decisions. Given both types of bribery decisions, now the authors can successfully simulate and quantify a firm’s intertemporal status and growth path.