Jackboots and Bootstraps: The Effect of Bribery on Entrepreneurship

This project tries to understand bribery’s effect on entrepreneurship, which could help policymakers design interventions to aid the development of new enterprises, thus fostering growth and alleviating poverty.

Economists have long been interested in how corruption affects firms, but the existing literature has left a fundamental question unanswered. Does a high perceived bribery rate discourage individuals from starting new businesses? The answer is not obvious. On the one hand, a bribe could be much more costly than a tax of equivalent value: bribes are traded in secret, so potential entrepreneurs are uncertain about how much money they will end up owing bureaucrats; bribes are also illegal, leaving firms susceptible to hold-up problems in which bureaucrats demand higher and higher payments. On the other hand, bribery could let firms “grease the wheels:” kickbacks can induce bureaucrats to skirt red tape and lower official tax liabilities.

Since economic theory is inconclusive, the question demands empirical investigation. This project is a pilot of the first round of a two-part data collection exercise in the Democratic Republic of the Congo (DRC) and Tunisia. The first round is an audit study. The researcher uses confederates posing as entrepreneurs to map the bribes that the bureaucracy demands from new businesses. The second round is a randomized controlled trial.  Among a set of individuals considering starting a business, a random subset will receive an insurance product that covers bribe payments. The main outcome measures will be whether the treated individuals are more likely to follow through on starting a business, and conditional on starting a business, whether they have higher profits and investments.

While bribery insurance itself is unlikely to be a feasible, scalable intervention for protecting firms in high-corruption countries, the lessons we stand to learn from this experiment could prove invaluable for designing effective anti-poverty policies. For example, the United States, the United Kingdom, and other donor countries have spent millions over the past decade funding programs to provide support for potential entrepreneurs in LICs (e.g. USAID’s PACE Initiative). Better understanding the constraints the public sector places on these would-be businessmen and women could improve these programs. In addition, previous research has suggested that economic opportunity can crowd-out violent conflict. That means that research into the frictions that stymy private enterprise development – in this case, bribery – holds the hope of developing strategies capable of achieving peace. After more than twenty years of conflict, no country needs those strategies more than the DRC.