Heterogeneous Bribery, Technology Choice, and Capital Accumulation

Abstract

We study the production, entry, and technological decisions of firms in the presence of bribery. We find that bribery can be justified even in the absence of bureaucratic inefficiencies. We document substantial technology-specific heterogeneity in bribery in 148 countries and incorporate it into a general equilibrium model, where firms use capital-intensive or labor-intensive technology. When bribery more heavily affects less efficient labor-intensive firms, resources move toward more efficient capital-intensive firms, resulting in higher capital accumulation and aggregate output. In poorer countries, the elimination of bribery only for capital-intensive firms increases the capital stock by 18.7% more and the aggregate output by 3.4% more than the complete elimination of bribery. In wealthier countries, the elimination of bribery only for capital-intensive firms increases the capital stock by 44.4% more and the aggregate output by 15.4% more than the complete elimination of bribery. Our findings challenge the established view of bribery as uniformly harmful and demonstrate how the within-country heterogeneity in bribery can explain cross-country differences in income.