Bribery, regulation and firm performance: evidence from a threshold model

Abstract

AbstractFirm-level bribery and regulation are two of the many determinants of firm performance. However, most of the existing studies examine the direct and linear effects of bribery and regulation and overlook their indirect effects. Using firm-level data, covering 20,343 firms in 78 developing countries, and employing a threshold model, the effects of firm performance’s standard determinants vary based on the bribery and regulation levels. Our findings reveal that the impact of bribery and regulation on firm performance varies significantly depending on corruption and regulation levels. Access to external finance improves firm performance if and only if the firms are exposed to bribes and firm-level regulation is below a given threshold. Furthermore, exports boost the performance of the firms that are exposed to more bribery and spend more time with regulation than those that face lower levels of regulation and bribery. While bribery harms firm performance, our findings reveal that spending time with regulation could improve firm performance if firms are exposed to low levels of bribery. Our findings confirm the ‘sand the wheels’ hypothesis and limiting firm-level bribery improves firm performance.