Crime does not pay – a trite saying, but in the world of bribery, it is certainly true.  Everyone always assumes that paying a bribe always leads to a direct benefit.  But is that assumption accurate?

A recent article, S.Y. Cheung, R. Rau, A. Stouraitis, Which Firms Benefit from Bribes, and By How much? Evidence from Corruption Cases Worldwide, Social Science Research Network, June 30, 2011, examined 166 prominent bribery cases in 52 countries worldwide during 1971 to 2007. 

The authors reached two significant conclusions:

• Firms that rely on bribes to win a contract are less efficient and profitable than their competitors; and
• The higher the rank of the government official who is bribed, the lower the benefit to the company that bribes the official.

The authors’ conclusions are not too surprising.  A company that relies on bribes to win foreign government contracts may turn to bribery because they cannot compete in the market.  The company has no alternative but to bribe to win a  contract.  The authors also found that even though the company may win the contract with a bribe, the company does not maximize shareholder value because the company is unable to use its resources in an efficient manner.

The authors’ second finding that the higher the government official, the larger the required payment, but the less beneficial to the company.  For a bribing company, paying a head of state to secure a contract is the most costly way to obtain additional business.

The primary rationale for the FCPA is that preventing foreign bribery is needed to stabilize foreign governments and allow institutions to provide higher quality services to the general population.  This rationale took on even greater significance in the aftermath of 9-11 because of the connection between terrorist havens and unstable foreign governments, especially in underdeveloped countries.

The authors’ findings add another economic rationale – consumer welfare.  The reduction of bribery results in a more efficient market in which consumers will benefit by more efficient companies winning more business.  An economic benefit in the marketplace and the overall stabilization of foreign government institutions provide strong justifications for aggressive FCPA enforcement. 

The full paper is available here.