(active) bribers are firms that purposefully engage in such informal dealings as a way of reducing their regulatory burden, obtaining a public market or an exclusive license, or gaining an advantage over competitors. Demand side (passive) bribers are firms that accept to participate in the bribe transaction process with public officials, potentially due to threats or vulnerability that lead to being targeted by officials and that force the illicit payment. Some firms will not, however, abide by these informal rules and despite requests (or threats) by public officials, will not accept to pay bribes, potentially for ethical or moral reasons. We identify such firms as "incorruptible" and use the latter, in particular, for a falsification test.

Businesses might expect various advantages from these informal transactions. In this paper, we focus empirically on two types of benefits that could be associated with informal payments to officials: (i) reduced tax and customs obligations, and (ii) securing public contracts.

# **II.1 Data**

The data used in this paper come from the WBES, a collection of a firm-level surveys of a representative sample of business environments mainly in developing and transition countries. Questionnaires cover a wide range of business environment topics such as infrastructure, competition, access to finance, as well as crime and corruption.<sup>10</sup> We use the standardized questionnaires and dataset over the period 2002-2006 from which we exclude advanced economies.<sup>11</sup> The survey data contain rich details on bribes and benefits expected for firms and allow controlling for a large set of observable determinants of corruption. To construct our four categories of firms’ bribe behavior, we make use of two questions relating to bribe transactions. First, we determine if a request for a bribe was made by public officials. To measure the incidence of a bribe request from an official, we rely on a set of questions in the survey asking firms whether a gift or informal payment was expected/requested in inspections and mandatory meetings with public officials from the following agencies: tax inspectorate, labor and social security, fire and building safety, sanitation/epidemiology, municipal police and environmental.<sup>12</sup> We aggregate these self-reported answers by firms

> 10The surveys are conducted using common guidelines in design and implementation, and a standardized module with identical questions allows for cross-country comparisons. Sample data are stratified using random sampling with replacement along strata for firm size, business sector, and geographic region within a country.

> 11 While a more recent standardized dataset is available for the period 2007-2016, these surveys do not provide information on interactions with public officials from different agencies, which are essential for our identification of graft demand and supply. Furthermore, they do not include information on the proportion of sales reported for tax purposes, which we use to measure tax evasion.

> 12The question is as follows: "Was a gift or informal payment ever expected/requested in inspections and mandatory meetings with officials of each of the following agencies in the context of regulation of your business?: (i) tax inspectorate, (ii) labor and social security, (iii) fire and building safety, (iv) sanitation/epidemiology, (v) municipal police, and (vi) environmental."

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