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Can corruption really function as “protection money” and “grease money”? Evidence from Chinese firms

Author

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  • Xu, Gang
  • Zhang, Dongyang
  • Yano, Go

Abstract

This paper directly investigates the “grease money” and “protection money” effects of corruption based on Chinese firm survey data. First, we identify a significantly positive effect of bribes on firm profitability only for non-state-owned enterprises (non-SOEs). Further empirical analysis shows that this positive effect mainly exists in less contract-intensive industries and simple goods industries. Then we find that corruption functions as “protection money” for non-SOEs by showing that bribes can lower effective tax rates. We further show that bribes can help non-state firms circumvent red tape and increase their probability of obtaining government procurement contracts, thus validating the “grease money” hypothesis. Our results suggest that both effects of corruption exist for non-SOEs in China, thereby identifying a new profit-enhancing factor in the non-state sector in recent years.

Suggested Citation

  • Xu, Gang & Zhang, Dongyang & Yano, Go, 2017. "Can corruption really function as “protection money” and “grease money”? Evidence from Chinese firms," Economic Systems, Elsevier, vol. 41(4), pages 622-638.
    • Handle: RePEc:eee:ecosys:v:41:y:2017:i:4:p:622-638
    DOI: 10.1016/j.ecosys.2017.03.001
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    Citations

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    Cited by:

    1. Pommeret, Aude & Yu, Xiaojun & Zhang, Lin, 2022. "Stringency of environmental policy in China: When pollution drives bribery," Economic Modelling, Elsevier, vol. 117(C).
    2. Han, Linsong & Li, Xun & Xu, Gang, 2022. "Anti-corruption and poverty alleviation: Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 150-172.
    3. Malkina, M. & Ovchinnikov, V., 2020. "Influence of regulatory burden and involvement of business in corruption on revenue: Grease vs sand effect," Journal of the New Economic Association, New Economic Association, vol. 47(3), pages 40-65.
    4. Hu, Juncheng & Li, Xiaorong & Duncan, Keith & Xu, Jia, 2020. "Corporate relationship spending and stock price crash risk: Evidence from China's anti-corruption campaign," Journal of Banking & Finance, Elsevier, vol. 113(C).

    More about this item

    Keywords

    Corruption; Protection money; Grease money; Transitional economy; Chinese firms;
    All these keywords.

    JEL classification:

    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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