Search and Screening Costs of Bribes

Abstract

I find that firms under-report profits in tax statements to reduce bribe demands. In response, bribe-extorting bureaucrats exploit differences in firms' opportunity costs of time to screen out firms with resources to pay bribes. In equilibrium, high-profit firms with cash holdings pay larger bribes in return for shorter paperwork processing times. Firms that hide profits face costs, because they cannot use unreported profits to acquire capital. Firms also make voluntary bribe payments to bureaucrats in return for government services and face associated positive search costs. Results hold only for firms without bureaucratic connections.