Bribery as a Signal of Employee Skill Bogdan Bonca ... - gwu.edu

Bribery as a Signal of Employee Skill
Bogdan Bonca (GWU), Artur Kolasa (GWU)
The paper looks at the process of bribing in the hiring process. While the practice
is not widespread in the developed world, in developing countries bribing to obtain a job
is rather common, especially for public sector jobs. We analyze the incidence of bribes
and ask whether the size of bribes offered can be treated as a signal for the future
employees skill level. The intuition behind our analysis is that a highly skilled employee
would have higher chances of getting alternative jobs, thus reducing the offer of a bribe.
We analyze the problem by developing a theoretical model and testing some of
the predictions of the theoretical model empirically. On the theoretical side, we develop a
utility maximization equation for a risk-neutral agent on the employer side and a similar
equation on the agent side. We allow for uncertainty of alternatives and correlate them
positively with skill. The results of the theoretical model suggest that higher skilled
works would offer lower bribes for a job than lower skilled workers. Additionally, we
find that, under certain conditions, hiring managers would find it beneficial to accept the
lower bribe of a higher skilled worker when faced with a dynamic optimization problem.
To test some of the results from the theoretical model, we use the World
Enterprise Survey data set, focusing on Bangladesh. As the survey lacks data on bribes
pain in the hiring process, we proxy that by the percentage of firm’s sales that the given
firm pays in bribes. The logic behind the proxy is that we expect to observe a strong
positive correlation between a firm’s propensity to pay bribes and its propensity to accept
them. Using an ordered logit estimation, the dependent variable is “the average
educational attainment of a typical production employee” in a given firm. This is an
ordinal variable with the following cutoffs:
1: no formal education (0-3 years education)
2: primary education (4-6 years education)
3: secondary education (7-12 years education)
4: university degree (13+ years education)
Our treatment variable is the proportion of annual sales paid in bribes. We control for
last year’s wages paid per firm, firm sales, firm size and the percentage of full time
employees that are offered training, and how many years of experience does the manager
have. 1 Since we use an ordered logit estimation, fixed effects can’t be applied. In order
to alleviate this issue, we cluster errors around industry identification variable (measured
at sitc 2 level).
The results from the empirical model reinforce the predictions of the theoretical mode.
Namely, the empirical model proves that there is a significant correlation between bribery
and the skill of the workers. Also, with 99% confidence, the model estimates that such
relationship is positive (suggesting that higher bribes can be attributed to higher skill
levels).
1 Size: 1: firm has between 5 and 49 workers, 2: firm has between 50 and 99 workers, 3: firm has over 100
workers.

Appendix
The following are preliminary results of an ordered logit with average educational
attainment of production employee as the dependent:
(1)
percentage of sales paid as bribes 0.0466***
(0.0159)
ln_sales 0.176*
(0.0933)
size -0.151
(0.194)
manager experience -0.0177
(0.0130)
percentage of full time employees trained 0.00767*
(0.00428)
ln_wages_last_year -0.0163
(0.121)
N 350