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Eat, Drink, Firms, Government: An Investigation of Corruption from the Entertainment and Travel Costs of Chinese Firms

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  • Hongbin Cai
  • Hanming Fang
  • Lixin Colin Xu

Abstract

We propose entertainment and travel costs (ETC) expenditures as a measure of corruption in Chinese firms. These expenses are publicly reported in firms' accounting books, and on average they amount to about 3 percent of a firm's total value added. We find that ETC is a mix that includes grease money to obtain better government services, protection money to lower tax rates, managerial excesses, and normal business expenditures to build relational capital with suppliers and clients. Entertainment and travel costs overall have a significantly negative effect on firm productivity, but we also find that some components of ETC have substantial positive returns to firms.

Suggested Citation

  • Hongbin Cai & Hanming Fang & Lixin Colin Xu, 2011. "Eat, Drink, Firms, Government: An Investigation of Corruption from the Entertainment and Travel Costs of Chinese Firms," Journal of Law and Economics, University of Chicago Press, vol. 54(1), pages 55-78.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/651201
    DOI: 10.1086/651201
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