Corruption and Productivity : Firm-level Evidence from the BEEPS Survey

Using enterprise data for the economies of Central and Eastern Europe and the CIS, this study examines the effects of corruption on productivity. Corruption is narrowly defined as the occurrence of informal payments to government officials to ease the day-to-day operation of firms. The effects of this "bribe tax" on productivity are compared to the consequences of red tape, which may be understood as imposing a "time tax" on firms. When testing effects in the full sample, only the bribe tax appears to have a negative impact on firm-level productivity, while the effect of the time tax is insignificant. At the same time, unlike similar studies using country-level data, firm level analysis allows a direct test of the "efficient grease" hypothesis by investigating whether corruption may increase productivity by helping reduce the time tax on firms. Results provide no evidence of a trade-off between the time and the bribe taxes, implying that bribing does not emerge as a second-best option to achieve higher productivity by helping circumvent cumbersome bureaucratic requirements. When controlling for EU membership the effects of the bribe tax are more harmful in non-EU countries. This suggests that the surrounding environment influences the way in which firm behaviour affects firm performance. In particular, in countries where corruption is more prevalent and the legal framework is weaker, bribery is more harmful for firm-level productivity.