firms had an interaction with tax officials over the last year and if so, whether the firms were expected or requested to give gifts to the officials. Responses to this question are the basis of one of WBES’s prominent corruption indicators—“Percent of firms expected to give gifts in meetings with tax officials”.<sup>6</sup> Appendix A contains the precise wording of all survey questions used in this paper and further details on the samples used in the analysis, including information for each country on how many observations were dropped because questions were not answered.

For simplicity in presentation, and following previous papers, we will rather inaccurately refer to a firm as 'guilty' when it was expected or requested to give gifts in the meeting with tax officials. This is the measure of corruption. The standard approach in the literature is simply to assume that all answers to the CQs are honest and to report statistics based on such answers.<sup>7</sup> These we call 'standard' estimates of corruption or guilt in what follows.

The second type of question is a forced-response random-response question (RRQ). For reasons made clear below, our methodology requires responses to more than one random-response question. The ones we use are intended to be on issues that are similarly sensitive to the subject matter on the CQ. This identifying assumption is important because we will assume that the probability of reticent behavior is the same for the CQ and the RRQs. The questions are listed in Table 2, together with summaries of the responses to each question in each of the countries.<sup>8</sup> Following Azfar and Murrell (2009), Clausen, Kraay, and Murrell (2011), and Kraay and Murrell (2015), survey respondents were presented with a series of ten sensitive questions. They privately toss a coin before answering each question, having previously been instructed to answer "Yes" if the coin comes up heads and otherwise answer the sensitive question. The series of ten questions includes three that ask about less sensitive acts. We do not use the data from these three questions: their inclusion is to give sophisticated reticent respondents the chance to answer "Yes" occasionally without affecting the data that we use. The seven more-sensitive questions used in the analysis are identified in bold in Table 2, but were not so highlighted in the questionnaire itself.

The data in Table 2 provide immediate justification for our assumption that the RRQs do little to encourage respondent candor. Absent reticent behavior, the rate of “Yes” responses on each of the RRQs should be at least 50 percent given that half of the responses would reflect the outcome of obtaining a heads on the coin toss, which should force a “Yes” response. Yet “Yes” response rates are below 50 percent in 47 of the 49 relevant cases in Table 2 (7 RRQs for each of 7 countries). Moreover, if a positive fraction of respondents had in fact done the sensitive acts in question, we should expect even

> 6 Several measures of corruption produced and used by the World Bank are available at: <u>http://www.enterprisesurveys.org/data/exploretopics/corruption</u>

> 7 With one caveat: refusals to answer are sometimes treated as admissions of guilt, as for example in analysis conducted by the World Bank’s Enterprise Surveys unit.

> 8 Because these RRQs are not part of the core questionnaire for the World Bank’s Enterprise Surveys, we placed these questions in selected Enterprise Surveys over the past several years, in collaboration with the Enterprise Survey team at the World Bank.  We are particularly grateful to Giuseppe Iarossi, Jorge Rodriguez, Veselin Kuntchev and Arvind Jain for their cooperation in placing these questions.

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