Entertainment and Travel Costs (ETC) is a standard expenditure item for Chinese firms with an annual amount equal to about 20 percent of total wage bills. We use this objective accounting measure as a basis to analyze the composition of ETC and the effect of ETC on firm performance. We rely on the predictions from a simple but plausible model of managerial decision-making to identify components of ETC by examining how the total ETC responds to different environmental variables. In our empirical analysis we find strong evidence that firms. ETC consists of a mix that includes bribery to government officials both as %u201Cgrease money%u201D and %u201Cprotection money,%u201D expenditures to build relational capital with suppliers and clients, and managerial excesses. ETC overall has a significantly negative effect on firm performance, but its negative effect is much less pronounced for those firms located in cities with low quality government service, those who are subject to severe government expropriation, and those who do not have strong relationship with suppliers and clients. Our findings have important implications on how to effectively curb corruption.
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Length: Date of creation: Sep 2005 Date of revision: Handle: RePEc:nbr:nberwo:11592
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Find related papers by JEL classification: L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior O1 - Economic Development, Technological Change, and Growth - - Economic Development H2 - Public Economics - - Taxation, Subsidies, and Revenue
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Daron Acemoglu & Simon Johnson, 2003.
"Unbundling Institutions,"
NBER Working Papers
9934, National Bureau of Economic Research, Inc.
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