CORRUPTION,PRODUCT MARKET COMPETITION,AND INSTITUTIONAL QUALITY: EMPIRICAL EVIDENCE FROM THE U.S. STATES

This article argues that the effect of corruption on competition is dependent on the institutional environment. When institutions are relatively efficient, observed corruption is likely to be associated with relatively less competition. Conversely, in areas with low quality institutions (e.g., excessively burdensome regulations), corruption may lead to relatively more competition. I employ unique data on competition, corruption, and institutional quality across U.S. states from 1997 to 2009 and report that a higher level of corruption is associated with relatively more competition in states with low levels of institutional quality. However, as institutional quality improves, the effect of corruption worsens. Thus, institutional quality is a fundamental determinant of the corruption‐competition relationship. Improving institutional quality, while at the same time reducing corruption, will increase competition and likely improve economic outcomes. (JEL D73, O17, L26)     

IMPACT OF CORRUPTION ON FIRM‐LEVEL EXPORT DECISIONS

This article examines the impact of corruption on the self‐selection of firms into domestic and export markets. A heterogeneous firm model predicts that corruption decreases the probability that a firm only sells domestically, increases the probability that a firm exports indirectly through an intermediary, and decreases the probability that a firm exports directly. The propositions of the model are tested using a comprehensive dataset of over 23,000 firms in 80 developing countries. The results confirm both the self‐selection of firms according to their productivity and the anticipated impact of corruption. This indicates that in developing countries where corruption is especially severe, intermediaries provide a crucial link to global markets. (JEL F1, O1)     

IS MORE COMPETITION ALWAYS BETTER? AN EXPERIMENTAL STUDY OF EXTORTIONARY CORRUPTION

Using a laboratory experiment, we assess whether increasing competition among public officials reduces extortionary corruption. We find that increasing the number of providers has no effect on bribe demands when citizens' search costs are high, but it increases corruption when search costs are low. The effect is absent in a parallel setting framed as a standard market, which we attribute to citizens using a nonsequential search strategy as opposed to sequential search in the corruption setting. We conclude that efforts to reduce search costs, such as infrastructure investments, are preferable to anti‐corruption policies aimed at increasing the number of providers. (JEL D73, D49, C91)     

PRICE COMPETITION UNDER COST UNCERTAINTY: A LABORATORY ANALYSIS

We study the relation between the number of firms and price-cost margins under price competition with uncertainty about competitors' costs. We report an experiment in which two, three, and four identical firms repeatedly interact in this environment. In line with the theoretical prediction, market prices decrease with the number of firms, but on average stay above marginal costs. Pricing is more aggressive than in equilibrium. Absolute and relative surplus increases with the number of firms. Total surplus is close to the equilibrium level, because enhanced consumer surplus through lower prices is counteracted by occasional displacements of the most cost-efficient firm. (JEL C90 , C72 , D43 , D83 , L13 )     

Corruption as a site for contested meaning: Elite constructions in India

This paper investigates the problem of corruption in India from a social constructionist perspective. The constructions of corruption among five elite groups (bureaucrats, judges, politicians, industrialists, and journalists) in the southern state of Andhra Pradesh were obtained through a total of 60 interviews. Members of these five elite groups play a critical role in constructing the problem of corruption for public discourse. These elite groups, with the possible exception of the media elite, are also primary targets of public accusations of corrupt behavior. This paper examines three major issues related to corruption: the definition of corruption, the so-called functionality of corruption, and the role of culture in fostering or inhibiting corruption. Narrow/legalistic or broad/moralistic definitions of corruption, the acceptance or rejection of functionality, and modernist or nationalist responses to the question of culture are shown to constitute the varied structures of reality constructed by the different elite groups. These constructions of the corrupt reality in India are explained with reference to specific interests of the elites and their positions in the social structure. Instead of treating corruption as an objective condition, this study seeks to view corruption as a process in which strategic elites in society, define the problem and negotiate solutions to it.A previous version of this paper was presented at the 1991 New York Conference for Asian Studies, Cornell University, Ithaca.     

THE COMPETITIVE RETURNS TO THE GLOBAL SEARCH FOR TALENT: PROFESSIONAL SPORTS MARKETS AND FOREIGNERS

We examine the geographical and racial diversity of a market's labor supply. While the likely impact of expanding supply is to increase the level of productivity, it is not obvious what impact the expansion would have on the overall level of competition. If the added labor increases productivity differentials or are disproportionately populated on high achieving firms, then the likely result would be greater imbalance. We find that while increases in the foreign‐born component are associated with an increase in the overall level of competition, the impact has diminished across time. (JEL C22, D23, D30)     

CORRUPTION: TOP DOWN OR BOTTOM UP?

This article studies the impact of corruption on an economy with a hierarchical government. In particular, we study whether centralizing corruption within the higher level of government increases or decreases the total amount of corruption. We show that when the after-tax relative profitability of the formal sector as compared to that of the informal sector is high enough, adding a layer of government increases the total amount of corruption. By contrast, for high-enough public wages and/or an efficient monitoring technology of the bureaucratic system, centralization of corruption at the top of the government hierarchy redistributes bribe income from the lower level to the upper level. In the process, total corruption is reduced and the formal sector of the economy expands.     

ANTI‐POACHING AGREEMENTS IN LABOR MARKETS

We analyze competition for experienced workers among wage‐setting firms. The firms can design poaching offers with higher wages to workers who switch from rivals relative to wages paid to their own existing employees. We evaluate the profit and welfare effects of anti‐poaching agreements that eliminate poaching offers as a recruiting method. Anti‐poaching agreements increase industry profits, whereas workers are made worse off. We show that the effects of anti‐poaching agreements on total welfare are determined by the magnitude of workers' switching costs and the productivity change associated with switching employers. (JEL L41, L40, J42)     

LEFT FOR DEAD: ANTI‐COMPETITIVE BEHAVIOR IN ORBITAL SPACE

In a dynamic investment framework with depreciation, we show incumbent satellite operators have incentives to “warehouse” a fraction of their assigned spectrum and orbital slots, keeping nonoperational assets in place, which reduces output, increases prices, and diminishes social welfare. Exploring three distinct market structures, we model firms' incentives to warehouse, and show conditions under which firms choose to warehouse rather than replace nonfunctioning satellites. We find a dominant firm with a competitive fringe produces more and longer duration warehousing relative to perfect competition or monopoly. Regulators could remediate warehousing by increasing a firm's marginal costs, or by increasing the probability of reallocating orbital slots that do not have a fully functioning satellite. (JEL L9, L5)     

FIRM HETEROGENEITY AND THE PATTERN OF R&D COLLABORATIONS

We consider an oligopoly setting in which firms form pairwise collaborative links in research and development with other firms. Each collaboration generates a value that depends on the identity of the firms that collaborate. First, we provide properties satisfied by pairwise equilibrium networks and efficient networks. Second, we use these properties in two types of situation: (1) there are two groups of firms, and the value of a collaboration is higher when firms belong to the same group; (2) some firms have more innovative capabilities than others. These two situations provide clear insights about how firms' heterogeneity affects both equilibrium and efficient networks. We also show that the most valuable collaborative links do not always appear in equilibrium, and a public policy that increases the value of the most valuable links may lead to a loss of social welfare. (JEL C70, L13, L20)     

DOES CORRUPTION ATTENUATE THE EFFECT OF RED TAPE ON EXPORTS?

I use firm ‐level data to examine whether corruption attenuates the adverse effects of red tape on exports. I find that, conditional on there being customs‐related red tape, a firm is better off if it can use bribes to lower the delay that it faces. However, I also find that corruption has a negative overall effect on a firm's decision to export. That is, corruption prevents some firms from entering the export market. These results suggest that to gauge the overall effect of corruption, we must compare its red‐tape attenuating effect with its adverse effect on a firm's decision to export. (JEL F10, F14, K42)     

INFORMATION DISCLOSURE POLICIES: EVIDENCE FROM THE ELECTRICITY INDUSTRY

While theory suggests that information programs may correct market failures and improve welfare, the empirical impacts of these policies remain undetermined. We show that mandatory disclosure programs in the electricity industry achieve stated policy goals. We find that the proportion of fossil fuels decreases, and the proportion of clean fuels increases in response to disclosure programs. However, the programs may produce unintended consequences. For example, programs may make “clean” firms cleaner, while leaving “dirty” firms relatively unchanged. If the marginal benefits of pollution abatement are larger at dirty firms than at clean firms, disclosure programs may induce inefficient abatement allocations. (JEL D83, Q58, D21)     

CONGLOMERATES AND REGULATION

Conglomerates operating integrated productions in different regulated and unregulated sectors may benefit of scope economies. However, the precise size of these synergies is often unknown to both rival firms and regulators. We show that the conglomerate's private information on scope economies may negatively affect both the regulated and the unregulated sectors depending on the precise nature of competition (strategic substitutes or complements). We also unveil a novel effect of regulation that involves an informational externality to the conglomerate's rivals. Notwithstanding these complications, and independently of the nature of competition, we show that in our model it is desirable, as for welfare, to let the firm run integrated productions, unless diseconomies of scope may realize. (JEL L51, L43, L52)     

STRATEGIC INFORMATION DISCLOSURE: THE CASE OF MULTIATTRIBUTE PRODUCTS WITH HETEROGENEOUS CONSUMERS

We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multidimensional preferences under which a firm, no matter whether producing a high‐ or low‐quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory. (JEL L15, L5)     

PRICE ADJUSTMENT POLICIES AND FIRM SIZE

A number of U.S. State Departments of Transportation have adopted a price adjustment policy designed to limit cost fluctuations of oil‐based inputs in government procurement. Similar policies are common in defense contracting, and have been used to offset financial losses of health insurance companies in Medicare and the Affordable Care Act. We show that while all bidders submit lower bids after the policy is introduced, the extent of bid reduction diminishes with firm size. Small new firms are able to compete more frequently, promoting auction competition and efficiency. (JEL H4, H57, D44)     

REGULATION VIA THREATS: POLITICS, MEDIA COVERAGE, AND OIL PRICING DECISIONS

Using the oil crisis of the late 1970s as a case study, we examine,the intertwined influences of public opinion and media attentionon the credibility of regulatory threats. We focus on threefactors: the intensity of public demands for regulatory intervention,the extent to which there are other competing demands on legislativeattention, and the availability of scapegoats external to theindustry. We use television news coverage of various topicsto measure these three factors. We hypothesize that firms threatenedwith potential regulation restrained price increases, with thelargest and most publicly visible firms exercising the greatestrestraint. We find that large, visible oil firms restrainedprice increases for the most important decontrolled prodicts(diesel fuel oil) when media coverage of the oil industry wasextensive. These firms exercised less restraint when the governmentwas busy with other issues or when political instability inthe Middle East offered an external rationale for oil priceincreases.     

The evolution of federal employment

The first federal employees (other than Founding Fathers) were clerks. As federal employment grew in the 1820s, its ranks came to be dominated by patronage workers. After the Civil War, bureaucrats slowly displaced patronage workers at the federal level. Now, federal employments are being privatized and the bureaucracy shrunk. I explain this evolution of federal employment with one simple model of politics in a changing environment. Politicians combine into political firms to promise benefits to subsets of voters in return for election. If elected, politicians provide the benefits as efficiently as possible. Thus, politicians choose the form and size of their political firms to maximize expected political profits. Environmental changes affect the choices. The breach of the Appalachians in the 1810s, defeat of the South in the Civil War and the simultaneous rise of big and transcontinental industry, and contemporary worldwide economic inte-gration (globalization) are three environmental changes that changed the efficient organization of federal political firms.     

INFORMATION AND THE PROVISION OF QUALITY DIFFERENTIATED PRODUCTS

Governments often enact information provision policies to overcome asymmetric information of product qualities. We show that increasing awareness among consumers of the quality of a good can (but will not always) encourage firms to produce goods with higher levels of quality. Even if product qualities increase, social welfare may fall as information provision results in too much product differentiation. We show that the effectiveness of emission taxes and output subsidies are affected by the level of consumer knowledge of product quality, and we identify conditions under which information provision is welfare enhancing relative to these price instruments. ( JEL L1 5, Q58)     

Effective tax rates and firm size in Ethiopia

The literature on Effective Tax Rates (ETRs) focuses on high‐ and middle‐income countries, but there is very little evidence on low‐income countries. This article addresses this gap with new evidence from Ethiopia. We investigate corporate ETRs in Ethiopia and whether the distributional effects they have in practice are in line with the corporate tax policy design. We calculate ETRs in line with the literature in this field, using profit tax at the numerator and gross profit at the denominator. We then analyse ETRs not only using panel data, focusing particularly on their relation to firm size, but also including other explanatory variables. Our main result is that, despite a proportional tax rate, small firms face a higher effective tax burden than larger firms, while middle‐sized firms face the lowest burden of all. We highlight that tax systems can have practical implications that differ largely from their policy design, due to compliance costs and imperfect enforcement. Measures to reduce compliance costs for small firms are particularly recommended.     

A COMMENT ON COMPETITION AND BIDDING BEHAVIOR: SOME EVIDENCE FROM THE RICE MARKET

In testing agents' responses to increased competition in sealed-bid first price-rice auctions, Meyer [1988] makes two erroneous assumptions: (1) that agents know ex ante the number of bidders in the auction, and (2) that firms forecast resale prices with information unavailable at the time of the auction. These two misspecifications are identified and corrected. A probit model provides a forecast of market competition, and agents' bids are modeled as a function of expected competition and factors affecting the value of each rice lot. The bias toward zero in Meyer's estimated coefficient on market competition is reduced.