Firm-level aggregate corruption and competition: The role of telecommunications infrastructure

Corruption can be viewed from the perspective of the principal-agent-client model as explained in Klitgaard (1988). In this model, asymmetric information exists between the principal who hires an agent who in turn interacts with a client, to collect taxes, for instance. The incentives for the agent and the client to engage in corrupt behavior depend on the perceived cost and benefit of corruption. In the absence of corruption, the agent benefits from moral satisfaction and suffers a moral cost in the event of corruption. The agent is faced with a choice. In the absence of ethics or accountability to the principal, the agent may act opportunistically and engage in corrupt behavior, especially when colleagues are also engaged in similar behavior. According to Klitgaard (1988), restructuring the relationship between the principal, agent and client to enforce accountability would be important to fight corruption. Technology can be integrated into this model to enhance accountability and reduce corruption. Bhatnagar (2003) and Bertot et al. (2010) have advocated for such integration.

This study examines the relationship between competition and corruption in the presence of enhanced telecommunications infrastructure. We use firm-level aggregate data provided by the World Bank Enterprise Surveys and collected between the period 2006-2018. Our fixed-effects results are two-fold. First, the number of competing firms increases corruption in developing countries. Second, bribery goes down with the number of competing firms in countries with better information and communication technology endowment. Our results are robust to controlling for endogeneity via the two-step, feasible efficient generalized method of moments, and suggest that e-governance may help to reduce firm-level corruption in a competitive environment. Given the negative impact of corruption on investment and growth, developing countries should aim at adopting and using more of telecommunications infrastructure to boost investment and economic growth.