Corruption and firm behavior

This paper investigates how corruption affects firrm behavior. Firms can engage in two types of corruption when seeking a public service: cost-reducing "collusive" corruption and cost increasing "coercive" corruption. Using an original and unusually rich dataset on bribe payments at ports matched to firrm-level data, we observe how firms respond to each type of corruption by adjusting their shipping and sourcing strategies. "Collusive" corruption is associated with higher usage of the corrupt port, while "coercive" corruption is associated with reduced demand for port services. Our results suggest that firms respond to the opportunities and challenges created by different types of corruption, organizing production in a way that increases or decreases demand for the public service. Understanding how firms respond to corruption has important implications for how we conceptualize, identify and measure the overall impact of corruption on economic activity.