Working Paper: NBER ID: w11592
Authors: Hongbin Cai; Hanming Fang; Lixin Colin Xu
Abstract: Entertainment and Travel Costs (ETC) is a standard expenditure item for Chinese firms with an annual amount equal to about 20 percent of total wage bills. We use this objective accounting measure as a basis to analyze the composition of ETC and the effect of ETC on firm performance. We rely on the predictions from a simple but plausible model of managerial decision-making to identify components of ETC by examining how the total ETC responds to different environmental variables. In our empirical analysis we find strong evidence that firms. ETC consists of a mix that includes bribery to government officials both as "grease money" and "protection money," expenditures to build relational capital with suppliers and clients, and managerial excesses. ETC overall has a significantly negative effect on firm performance, but its negative effect is much less pronounced for those firms located in cities with low quality government service, those who are subject to severe government expropriation, and those who do not have strong relationship with suppliers and clients. Our findings have important implications on how to effectively curb corruption.
Keywords: corruption; Chinese firms; entertainment costs; travel costs; government service
JEL Codes: L2; O1; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher government expropriation (H13) | increased ETC (L94) |
| better government services (H11) | decreased ETC (Q42) |
| higher ETC (L94) | increased bribery to government officials (H57) |
| higher ETC (L94) | decreased firm performance (L25) |
| better corporate governance (G38) | decreased negative impact of higher ETC on firm performance (L25) |
| strong relationships with suppliers and clients (L14) | decreased negative impact of higher ETC on firm performance (L25) |