Lobbying and Bribing: From Substitution to Complementary Rent-seeking Strategies

Although rent-seeking is generally condemned, lobbying and bribery as two strategies to influence government are not the same. Bribery is illegal and should fight against it while lobbying is legal and usually considered informative for policy-making but need to be regulated. The literature indicates generally that lobbying for change makes bribery redundant and that it is a substitute for bribery as countries develop. However, this study is skeptical about the substitute relationship between lobbying and bribery, and based on the interactions among firms and collective lobbying, shows that some complementarities exist between them. Using data from 20,000 companies in 37 countries covered by the World Bank Enterprise Surveys, the results of the firm-level analysis show an asymmetric substitutability between lobbying and bribery. Lobbying has a negative effect on the likelihood of paying bribes but the positive effects of bribery on lobbying negates the theory that lobbying firms will stop paying bribes. In addition, the risk of lobbying failure makes firms use bribery as an insurance policy and this generates the first source of complementarity. Then, firm-level data were integrated at the industry level to see whether interactions between firms with common interests change the interrelationship between lobbying and bribery. According to the results, at the industry level, substitutability of lobbying and bribery disappears. The reason is that the benefits of collective lobbying inside industry are indirect and less strong and, therefore, it does not make bribery by individual firms redundant. In fact, the results show that the effects of bribery on lobbying are positive and extremely significant. The complementarity intensifies at industry level because bribery, by declining the legitimacy of the current rule, makes lobbying for an alternative more effective. Lobbying and bribery are not in conflict but they are different forms of cooperation on the collective rent-seeking continuum.