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Plain brown envelopes


Themes: Corporate governance and ethics

Firms bribing their way to contracts underperform for up to three years before and after securing the work for which the bribe was paid

Research led by Raghavendra Rau, Sir Evelyn de Rothschild Professor of Finance at Cambridge Judge Business School, has focused fresh light onto bribery and flies in the face of previous survey-based studies.

Traditionally bribery has been studied by analysis of perceptions or self-reported survey-based evidence. Professor Rau concentrates on the date a contract was awarded for which a bribe was paid.

He says that if a bribe had been paid in 1995 and went undetected until 2005, it was possible to calculate the impact on the company of getting the contract at that time. By comparing the amount of the bribe paid it was possible to calculate negative or positive aspects against the company’s gain from the contract.

“We found individual companies gained an average of USD7 of benefit for every dollar they paid but the benefit disappeared the higher they want.

“If you bribe a Head of State the amount you get from the contract is subsumed by the value of the bribe itself because the Head of State extracts all the value of the bribe.”

Professor Rau added that the research showed that ‘inefficient’ rather than ‘best performing’ companies paid bribes.

“For the worst performing companies’ shareholders, it’s good as long as they don’t try to buy up a Head of State and concentrate on a lower tier official.

“From the point of view of society it’s terrible because the worst kind of companies are winning the contracts and that amounts to a distortion of resource allocation in an economy.”

Professor Rau insists the research has taken in ‘objective hard-core evidence’ that has also revealed characteristics of bribe-paying firms against the benefits the firms receive from handing over bribes.

Firms that win contracts by paying bribes under perform for up to three years before and after securing the contract for which the bribe was paid.

Contrary to previous survey-based studies; a firm’s performance, the rank of the politician bribed as well as characteristics of bribe-paying and bribe-taking countries affect the magnitude of the bribe.

Professor Rau is the Sir Evelyn de Rothschild Professor of Finance at Cambridge Judge Business School.