Academic journal article Management International Review

Why Do Firms Bribe? Insights from Residual Control Theory into Firms' Exposure and Vulnerability to Corruption

Academic journal article Management International Review

Why Do Firms Bribe? Insights from Residual Control Theory into Firms' Exposure and Vulnerability to Corruption

Article excerpt

Abstract:

* This study answers the questions of why firms bribe government officials and why some firms pay higher bribes than other firms. Using insights from residual control theory, we examine how governments exercise residual rights of control through regulation or state ownership of firms, and how these rights affect the payment and size of bribes by firms.

* We argue that firms vary in their exposure and vulnerability to residual rights of control by government officials, depending on the firms' characteristics and circumstances. Differences in firms' exposure and vulnerability to corruption affect their threat point (i.e. ability to walk away) and thus affect which firms pay bribes and bribe size.

* Our results show that, at the firm level, bribe size depends on how much a government can exercise residual rights of control and the firm's threat point. At the same time, at the country level, the type of corruption matters; pervasive corruption is positively related, while arbitrary corruption is negatively related, to bribes paid.

Keywords: Residual control theory * Corruption * Bribery * Pervasive and arbitrary corruption

Introduction

Bribes have been paid at least since 3400 BC, according to archaeologists who found an Assyrian tomb listing the names of "employees accepting bribes" (Martin 1999, p. 1). Despite the longevity of bribery (Martin 1999), our understanding as management scholars of bribery is still limited. For example, how do firm characteristics affect bribes? How does the existing pattern of corruption in a country affect an individual firm's propensity to bribe? These are the questions we address in this paper.

Following past research (Doh et al. 2003), we define corruption as the abuse or misuse of public power for private (personal) benefit (1). Our goal is to "lift the veil on corruption" by developing and testing a management perspective on bribery that incorporates firm heterogeneity. To do this, we use insights from residual control theory (Grossman and Hart 1986; Hart and Moore 1990; Tirole 1999) to examine how governments exercise residual rights of control through regulation or state ownership of firms, and how the firm's threat point (i.e., its ability to walk away) affect the level of bribes paid to government officials.

The residual control theory of the firm (Grossman and Hart 1986; Hart and Moore 1990) argues that actual behavior of a firm depends on who owns the residual rights to control the firm's assets. Residual rights are "the rights to determine the uses of assets under circumstances that are not covered by contractual terms" (Foss and Foss 1999, p. 4). Politicians or government officials can wield their residual rights by imposing rules and regulations on firms. This is why Johnson et al. (1998, p. 387) argue "[i]n most countries politicians maintain property rights in firms, typically in the form of residual control rights ..."

Based on their characteristics and circumstances, firms vary in their exposure and vulnerability to residual ownership by government officials. (2) We argue that a firm's exposure (in the sense of the number of stressors or pressures placed on firms by exogenous events) to public corruption should vary depending on the pervasiveness of national corruption and the frequency with which a firm's activities brings it into contact with government officials. A firm's vulnerability (in the sense of its ability to resist these stressors or pressures) to corruption should also vary, depending on the resources (financial, political or otherwise) firms have at their disposal, which make them better able to resist these pressures. Residual control theory suggests that, the greater firms' exposure and vulnerability to corruption, the more likely are they to bribe government officials (3).

This suggests that residual control theory is an appropriate theoretical lens for understanding bribery. …

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