What Is the Effect of Market Competition on Corruption? Some Surprising New Findings

How does market competition affect the prevalence of corruption? Some people think that increasing competition could decrease corruption (see here and here). The intuition is that increased competition lowers firms’ profits, meaning that public officials cannot extract as much money out of the firms through extortive threats (e.g., a threat to falsely report noncompliance with safety regulations unless the firm pays a bribe). As the saying goes, you can’t squeeze blood from a turnip. By contrast, the argument continues, in less competitive markets firms have higher profits, and officials, knowing this, can use threats to extract some or all of this surplus for themselves. However, others have argued that increased market competition may lead to more corruption. Those taking this position tend to emphasize collusive rather than extortive corruption (see here and here) and point out that increased market competition makes collusion—which is, of course, a risky proposition—more attractive to firms, because the firms have more to gain from a leg up on their competitors. For example, an importing firm that pays a bribe to avoid paying customs duty will receive greater benefit from this competitive advantage when competition is fierce, since it will allow the firm to reduce prices and increase its market share more extensively. A monopolistic importer, by contrast, has less of an interest in paying the bribe to avoid the import duty, since a monopolist can offset much of the duty by raising consumer prices without needing to worry about losing much market share.

So, one can construct plausible theoretical arguments in both directions. What does the empirical data say about which story is closer to the truth? There have been a handful of studies so far, but they provide contradictory or equivocal results—some studies find that more competitive markets are associated with less corruption (see here, here and here), but others have found the opposite. But these studies focus on “corruption” generally, while the theories sketched above suggest that the effect of market competition on corruption may differ depending on the type of corruption—coercive or collusive. One prominent study, by Alexeev and Song (2013), explicitly incorporates this distinction and finds—based on analysis of data from the World Bank Enterprise Surveys of manufacturing firms in different countries—that increased competition increases the prevalence of collusive corruption. While this is an important step in the right direction, the survey data used here is still not ideal: the measure of “collusive corruption” is based on the respondent firms’ answer to a question about the amount of money firms in their line of business typically need to pay to public officials each year “to get things done,” which seems both vague and potentially overinclusive.

Luckily, later on the World Bank Enterprise Surveys expanded the range of corruption measures collected as part of its Investment Climate surveys in developing countries, recently publishing the latest of these surveys (get the data here), that may shed new light on this debate. The attractive feature of this more comprehensive survey data is that, in contrast to the data used by Alxeev and Song, the new surveys ask not only about the one vague measure of corruption, but ask separately about four different kinds of informal payments: to tax officials (hereinafter tax bribe); to secure government contracts (hereinafter contract bribe); to secure an import license (hereinafter import bribe); and to secure an operating licensing (hereinafter operating bribe). The survey, both in its current and older version, further asked every firm to report the number of competitors that it faces in its market of operation, which provides a ready firm-specific measure of market competition.

A thorough analysis of the competition-corruption link using this new data will need to await future work, but as a first step, I conducted some preliminary, exploratory quantitative analysis of the Investment Climate survey data. The results were surprising, and suggest not only is asking whether “corruption” is positively or negatively correlated with market competition is too crude, but also that even the proposed collusive-coercive distinction does not adequately capture the nuances of the relationships between competition and various forms of corruption.

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Guest Post: Against the “More-Is-Better” Principle in Corruption Survey Design

Frederic Lesne, a researcher at CERDI/Clermont Auvergne University (France), contributes today’s guest post:

A series of recent posts on this blog have addressed a persistent difficulty with corruption experience surveys: the reticence problem–in other words, the reluctance of respondents to give honest answers to questions about sensitive behaviors–which may be caused by fear of retaliation or by “social desirability” bias (fear of “looking bad” to an interviewer—see here, here, and here.) Various techniques have been developed to try to mitigate the reticence problem, leading to a range of different survey designs.

How can we tell if a corruption survey is well-designed? Some researchers, attuned to concerns about social desirability bias, implicitly or explicitly apply what some have dubbed the more-is-better principle. According to this criterion, the best wording for a sensitive question is the one that produces the highest estimates of the sensitive behavior (and the lowest non-response rates).

Yet there are reasons to question the more-is-better principle. Changing the wording of a sensitive question may not only alter its sensitivity but also the respondents’ understanding of the question and ability to answer it. This may lead to a measurement bias that causes the modified wording to produce higher estimates of the behavior, not because of more effective mitigation of social desirability bias, but because of the exacerbation of other forms of bias or inaccuracy. Consider a few examples: Continue reading

Using the Unmatched Count Technique (UCT) to Elicit More Accurate Answers on Corruption Experience Surveys

With apologies to those readers who couldn’t care less about methodological issues associated with corruption experience surveys, I’m going to continue the train of thought I began in my last two posts (here and here) with further musings on that theme—in particular what survey researchers refer to as the “social desirability bias” problem (the reluctance of survey respondents to truthfully answer questions about sensitive behaviors like corruption). Last week’s post emphasized the seriousness of this concern and voiced some skepticism about whether one of the most common techniques for addressing it (so-called “indirect questioning,” in which respondents are asked not about their own behavior but about the behavior of people “like them” or “in their line of business”) actually works as well as is commonly assumed.

We professors, especially those of us who like to write blog posts, often get a bad rap for criticizing everything in sight but never offering any constructive solutions. The point is well-taken, and while I can’t promise to lay off the criticism, in today’s post I want to try to be at least a little bit constructive by calling attention to a promising alternative approach to mitigating the social desirability bias problem in corruption experience surveys: the unmatched count technique (UCT), sometimes alternatively called the “item count” or “list” method. This approach has been deployed occasionally by a few academic researchers working on corruption, but it hasn’t seemed to have been picked up by the major organizations that field large-scale corruption experience surveys, such as Transparency International’s Global Corruption Barometer (GCB), the World Bank’s Enterprise Surveys (WBES), or the various regional surveys (like AmericasBarometer or Afrobarometer). So it seemed worthwhile to try to draw more attention to the UCT. It’s by no means a perfect solution, and I’ll say a little bit more about costs and drawbacks near the end of the post. But the UCT is nonetheless worth serious consideration, both by other researchers designing their own surveys for individual research projects, and by more established organizations that regularly field surveys on corruption experience.

The way a UCT question works is roughly as follows: Continue reading