A dynamic managerial theory of corruption and productivity among firms in developing countries

ABSTRACT. In this paper, a simple dynamic model of efficient firm-level managerial resource allocation to two uses, one involving productivity activities and another one involving corruption activities to "get things done" was developed. The model follows the optimal control theory process. Two operational equations are derived representing firm growth and shadow-price behavior. Firm-level interview data on surrogates for the firm's inputs was used for domestically owned firms in developing economies covering two time periods. The SUR method was used to estimate jointly the two equations. Overall, the model fit the data quite well. It was found that the managerial surrogates; namely, capacity utilization, formal worker training, and the time spent dealing with government regulations, were positive and significant predictors of firm output growth and the shadow-price of its capital with a few negative exceptions. Implicitly, there appears to be a trade-off between managerial resources used for growth and those used for the shadow price. Policy implications were discussed briefly.JEL Codes: C51; D81; E60; K49; M29Keywords: firm; corruption; dynamic; growth; shadow price; developing countries(ProQuest: ... denotes formulae omitted.)1. IntroductionThe purpose of this paper is to take a managerial resource microeconomic perspective on corruption (or bribery) payments by the business firm to government officials for the purpose of "getting things done" in order to carry out its business of producing and selling products. The paper develops a simple dynamic managerial resource allocation model to show how managerial resources are allocated efficiently to two alternative uses, one use to improve the productivity of the firm's production and selling activities and another use to spend time and money to bribe government officials to obtain licenses, permits, fees and tax reductions and the like to "get things done." The model is quite general in that it can be applied to firms in either developed or developing economies. In this paper, the model is applied to developing economies as a matter of preference and also because of the availability of suitable firm-level micro data. The basic two-part question addressed by the paper is, What role does firm management have in the corruption and productivity process? and Can this role be measured?The literature on the economics of corruption in general is quite voluminous and a survey of it is beyond the scope of this paper. Useful surveys of this literature include the work by Aidt (2003), Lambsdorff (1999 and 2007), Bardhan (1997), and Rose-Ackerman (1975, 1978, 1999, and 2010), to name only a few. Aidt, in particular, discusses four different analytical approaches to the economics of corruption. Lambsdorff focuses mainly on institutional problems related to corruption practices, sociological aspects, and prevention. Rose-Ackerman focuses on cross-country corruption and the research thereof and the need to change the legal structure of countries.Close' to the micro-level approach used in the present paper is the work by Ades and Di Telia (1999), which focuses on the individual firm and the role of its market structure (or competition) in affecting the amount of corruption engaged in by the firm. Another useful market structure approach to modeling the price and cost of corruption is the work by Shleifer and Vishny (1993). Kaufmann and Wei (1999) use firm-level data in regression analyses on corruption and the time firm managers spend with bureaucrats in order to "get things done." Also, related to the present paper at least in terms of the type of data used is the study by Heilman et al. (2000) that uses interviews of some 3,000 firms in 20 developing countries to produce profiles of corruption across countries. Their survey-type questions are similar to those used in the Enterprise Surveys of the World Bank Group (2010) to gather firm-level data on corruption, which is used in the present study. …