As discussed in the previous chapter on the impact of corruption on performance, bribe has ubiquitous flow from industry to government officials in India. In this chapter, we focus on what determines bribery using micro-level data. To analyse the issue of corruption and bribery at firm level, we specifically seek to know why some firms pay bribe while others do not in an economy when they face the same macroeconomic environment, policy and regulations. Specifically, we are interested to investigate the factors that determine payment of bribe to government official. In the recent years, on this issue, there is a surge in evidence based on firm level data. This is a clear departure from the traditional literature which had mainly focused on macroeconomic and social factors (for example, Sanyal, 2005; Treisman, 2000).
Studies based on micro-level evidence have hypothesized several important firm-level characteristics which lead to bribery. Kenyon (2008) attempts to explain that firms which are evading taxes are more or less likely to face demands for informal payments from government officials and they have more or less confidence in their capacity to influence regulations that affect their business. Gaviria (2002) has shown that bureaucratic interference is higher in firms which are more likely to pay bribes and this is a clear defiance of the conventional wisdom, suggesting that bribes can increase efficiency by allowing firms to circumvent bureaucratic harassment. Svensson (2003) argues that the control rights stem from the existing regulatory system and the discretion that the public officials have in implementing, executing and enforcing rules and benefits that affect firms such as business regulations, licensing requirements, permissions, taxes, exemptions and public-goods provision. Therefore, bureaucratic and regulatory environment is crucial for bribe payment. Linking the issue of profitability with bribery, Clarke and Xu (2004) show that firms which have relatively higher profitability are more likely to pay bribes. Svensson (2003) pointed out that higher profits weakens the firm's bargaining position, since the public official can demand a higher bribe for a given service and the firm can also afford to pay it.