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

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  • Hongbin Cai
  • Hanming Fang
  • Lixin Colin Xu

Abstract

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11592.

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Date of creation: Sep 2005
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Handle: RePEc:nbr:nberwo:11592

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Cited by:
  1. Bin Dong & Benno Torgler, 2010. "The Causes of Corruption: Evidence from China," Working Papers 2010.72, Fondazione Eni Enrico Mattei.
  2. Xu, Lixin Colin, 2010. "The effects of business environments on development : surveying new firm-level evidence," Policy Research Working Paper Series 5402, The World Bank.
  3. Fan, Joseph P. H. & Morck, Randall & Lixin Colin Xu & Yeung, Bernard, 2007. "Does"good government"draw foreign capital ? Explaining China's exceptional foreign direct investment inflow," Policy Research Working Paper Series 4206, The World Bank.
  4. L. Alan Winters & Shahid Yusuf, 2007. "Dancing with the Giants: China, India, and the Global Economy," World Bank Publications, The World Bank, number 6632, January.
  5. Deininger, Klaus & Jin, Songqing, 2009. "Securing property rights in transition: Lessons from implementation of China's rural land contracting law," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 22-38, May.
  6. Maggie X. Chen, 2009. "The Matching of Heterogeneous Firms and Politicians," Working Papers 2009-05, The George Washington University, Institute for International Economic Policy.
  7. C. Simon Fan & Chen Lin & Daniel Treisman, 2010. "Embezzlement Versus Bribery," NBER Working Papers 16542, National Bureau of Economic Research, Inc.

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