make gifts or informal payments to public officials to "get things done" and reports that gifts or informal payments were expected/requested in interactions with public officials. The dummy variable takes the value of 0 under two circumstances: (i) if the firm does not pay a bribe, or ii) if a firm pays a positive amount in bribes but reports that bribes were not expected/requested in its interactions with public officials.

The supply side of corruption is captured by a dummy variable, _Supply_ , which takes the value of 1 if a firm reports spending a positive share of its annual sales to make gifts or informal payments to public officials to "get things done" and reports that gifts or informal payments were not expected/requested in interactions with public officials. The dummy variable takes the value of 0 under the following circumstances: (i) the firm does not pay a bribe to public officials, or ii) a firm paid a positive amount of bribes and reports it was requested to do so.

Non-bribe paying firms are also divided into two categories based on the presence or absence of bribe requests from public officials. The dummy variable for "Incorruptible" firms takes the value of 1 if the firm reports not paying bribes when a bribe was expected/requested in at least one of the interactions with public officials. The dummy takes the value 0 when (i) the firm pays a bribe, or ii) a firm does not pay a bribe and reports that no bribes were requested in interactions with public officials. Finally, the dummy for "Non-bribe payers" takes the value of 1 if the firm reports not paying bribes when no bribes were requested during interactions with public officials and 0 otherwise. These categories of bribe paying behavior will be our key explanatory variables.

We examine two types of transactions where firms might benefit from complying with a bribe request or from offering a bribe to public officials: tax evasion and obtaining government contracts. With regard to tax evasion, the WBES asked firms to report the percentage of the total sales reported for tax purposes.<sup>15</sup> The proxy for tax evasion, or the proportion of sales not reported for tax purposes, is obtained by subtracting sales reported for tax purposes from 100%. Regarding corruption in procurement, in the WBES, firms were asked to report the share of the contract value paid informally to secure government contracts.<sup>16</sup> These two types of benefits from graft activities will be our key dependent variables.

Table 2 presents information on firms’ bribe behavior types and potential benefits associated with graft activities observed in our sample using the mean of each variable. Demand side bribe payers - i.e. firms paying a bribe in the context of a request by government officials - represent 24% of the sample. Another 17% of firms are supply

> 15The question is as follows: "Recognizing the difficulties many business establishments face in fully complying with taxes and regulations, what percent of total annual sales would you estimate the typical firm in this establishment’s line of business declares for tax purposes?" While this question and other sensitive questions on corruption are phrased indirectly, answers are usually interpreted as an admission of the behavior by the firm itself, as we do here (Hellman et al., 2003; Fisman and Svensson, 2007).

> 16The question is as follows: "When establishments in your industry do business with the government, how much of the contract value is typically expected in gifts or informal payments to secure the contract?"

9