European Journal of Political Economy
Vol. 18 (2002) 47 – 60
www.elsevier.com/locate/econbase
Why firms pay occasional bribes:
the connection economy
Ariane Lambert-Mogiliansky
CERAS, Ecole Nationale des Ponts et Chausse´es, 28 rue des Saints-Pe`res, 75 343 Paris, France
Received 1 November 2000; received in revised form 1 March 2001; accepted 1 May 2001
Abstract
This paper suggests that legal business networks facilitate corruption. When the prospects of
future deals fail to provide incentives to comply, bribes can be enforced relying on punishments in
the network through exclusion. Network members administer the punishments because of the fear
that the bureaucrat will retaliate against all network members. The bureaucrat may, for instance, stop
revealing his private information to the network. The analysis predicts that the extent of occasional
corruption can be larger when the legal and administrative rules are complex and unstable, and if the
market is poorly developed. The paper discusses policy measures to reduce corruption. D 2002
Elsevier Science B.V. All rights reserved.
JEL classification: L14; L2; K42
Keywords: Corruption; Network; Enforceability
1. Introduction
Some illegal transactions are occasional by nature. An example of this is when a hotel
manager ‘‘buys’’ a building permit in violation of environmental laws.1 In other cases, a
corrupt transaction may be the first step in a long-running illegal relationship. The deal can,
however, be perceived as occasional when the prospects of future cooperation are uncertain
because, for example, the parties do not know each other.2 Occasional corruption is then a
E-mail address: ariane.lambert@mail.enpc.fr (A. Lambert-Mogiliansky).
1
When the hotel is built, the owner of the hotel has no need for other illegal favors (in particular from the
construction permit bureau). He simply runs his business.
2
The firm may not know how long the civil servant will remain in office.
0176-2680/02/$ - see front matter D 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 1 7 6 - 2 6 8 0 ( 0 1 ) 0 0 0 6 8 - 4

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A. Lambert-Mogiliansky / European Journal of Political Economy 18 (2002) 47–60
port of entry into repeated illegal cooperation. The fact that the transaction is occasional
exacerbates the parties’ incentives to cheat each other: Why do firms pay bribes in such
situations?
This paper suggests that business networks can provide an answer to this question. Firms
generally belong to a business network because it is profitable to do so (in particular, they
gain access to the insiders’ information). A bureaucrat will be able to exploit this fact if the
non-payment of the bribe triggers exclusion. Cheating then becomes very costly. I show
that, in a network, firms can be induced to discipline each other with respect to bribe
payment for fear of collective punishment. To obtain an intuition for this result consider the
following situation. We have a bureaucrat who can seldom offer illegal favors to any
particular firm. The threat of terminating the relationship is therefore not sufficient to secure
the payment of bribes. We now assume that the bureaucrat has also private information that
is of (little) value to firms (for example, he is aware of procurement projects before this
information is released to the public). In a situation where the firms discount the future, this
feature may only have a limited impact on incentives to pay the bribes. In the presence of a
business network, however, the effect can be quite dramatic: large bribes become
enforceable. The reason is that the bureaucrat can threaten not to reveal his information
to the network unless the firm that failed to honor the illegal contract, i.e. refused to pay the
bribe, gets excluded. The firms may then prefer to exclude from the network cheating
members. As a result firms also prefer to pay their bribes rather than to lose access to the
resources available in the network.
A contribution of the approach taken in this paper is to highlight links between the extent
of corruption and aspects of the legal economy. In particular, I unveil the significance of
asymmetric information between the firms and the bureaucrat.3 The bureaucrat is able to
profit from illegal collusion because the firms value his (or her) private information on legal
matters. The more unstable and complex the legal administrative framework, the more
valuable the bureaucrat’s insider information. This favors the (strategic) complementarity
between corruption and network interaction.
A second aspect of transparency in the legal economy relates to inter-firms relationships.
The better developed the market, the lower the value of the firms’ private information to
others (because prices convey most of the business-relevant information). This can make it
more difficult to sustain occasional corruption. In contrast, in an economy where firms are
highly dependent on ‘‘good connections’’ to do business, corruption is expected to be more
widespread.
The results suggest that a government that wishes to reduce corruption should settle for
simple and stable legal and administrative rules and improve on the information provided to
the private sector. The government should also promote development from a personalized
‘‘connection economy’’ into an anonymous market economy, for example, by promoting
the development of efficient arbitrage courts.4
3 This is distinguished from asymmetric information between the ‘‘principal’’ (the government) and the
bureaucrat as in most agency models of corruption (collusion). See for instance Laffont and Tirole (1993).
4 The idea is that in the absence of well-functioning arbitrage, business partners do in effect bear the whole
risk for defection from the other parts. Therefore, they would need a lot of information to evaluate those risks. A
business network may be the best place to obtain this kind of information.

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A. Lambert-Mogiliansky / European Journal of Political Economy 18 (2002) 47–60
49
There exists a widespread consensus among empirical and theoretical sociologists
(see for instance Kadushin, 1995; Skworetz and Willer, 1993; Useem, 1982) that net-
works play an important role in business. In particular, privileged access to information
is regarded as a main resource of a business network. The connections between occa-
sional corruption and business networks have been emphasized by the French sociol-
ogists Meny (1992) and Cartier Bresson (1997).5 In the 1990s, corruption affairs in
France also revealed a close connection between powerful networks and corruption.6
My aim in this paper is to formally investigate a mechanism that connects corruption
to business networks. The argument I develop is by no means exhaustive. There exist
other mechanisms with a potential to enforce occasional bribes. Organized crime is one of
these. Another mechanism is when the bureaucrat retaliates by refusing to provide legal
services.7
The economic literature concerned with collusion and corruption usually assumes that
side contracts are enforceable.8 I shall relax this assumption. Instead, I propose a solution
using the theory of community enforcement.9 Fascinating applications that have shed light
on economic historical puzzles have been developed by Milgrom et al. (1990), Greif
(1989) and Greif et al. (1994). Grief et al. provide an explanation as to why, in the Middle
Ages, rulers in trade centers promoted merchant guilds. They argue that the guilds
provided the rulers with an instrument to commit to the safety of alien merchants. Safety
was necessary for the expansion of trade. As in the case of occasional corruption, bilateral
reputation (between the ruler and alien merchants) was not sufficient. Merchant guilds
allowed for a multilateral reputation mechanism to develop. As a result, fair and safe trade
could be secured. In a similar way, I argue here that a business network provides a mul-
tilateral reputation mechanism that is able to surmount the enforcement problem in oc-
casional corruption.
The results in the paper are also consistent with findings in development economics. In
particular, Barnerjee and Newman (1998) investigate the links between the ‘‘connection
economy’’ in traditional sectors and under-development. They show how the informa-
tional advantage of the traditional inefficient sector may result in the economy becoming
stuck in a poverty trap.10
5 Cartier Bresson (1997, p. 80) writes: ‘‘In the second case (when corruption is occasional), it is most often
organized by social networks.’’
6 Central participants implied in the corruption scandals in the management of social housing (HLM) in les
Hauts-de-Seine and Nimes were free masons (Vogelweith and Vaudano, 1995 pp. 128 – 129). L’Usine Nouvelle
(1996) provides an exhaustive description of the French regional business networks and their connections with
prominent people involved in corruption scandals.
7 This argument, however, raises the issue of why the bureaucrat would bother with illegal favors when he
can extract rents by simply threatening not to do his job. My view is that extortion is a topic of its own that
deserves more research.
8 See for instance Laffont and Tirole (1993), Kofman and Lawarree (1993), Lambert-Mogiliansky (1998). An
exception is in Tirole (1992) who briefly develops a reputation argument.
9 The theory of community enforcement has been developed by Cremer (1986) and Kandori (1992).
10 Corruption is now widely recognized as a main obstacle to development in LDCs and Transition
economies. See for instance, Hellman et al. (2000).

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In Section 2, I present the setting. The network interaction and the corruption game are
described. In Section 3, I analyze an equilibrium where the bureaucrat can exploit the
network to enforce the payment of bribes. In Section 4, I derive comparative static results
and discuss implications for anti-corruption policy. Section 5 sets out conclusions.
2. The setting
One bureaucrat and n firms interact in two fields.11 To simplify the presentation, we
start by describing the network game. We then introduce the corruption game. The two
games are brought together in the next section.
2.1. Network interaction
Network interaction is modelled as a game where players exchange information. The
actions within the network are observable by all network members.12 In each period, the
firms simultaneously engage in nÀ1 bilateral interactions. In its interaction with firm j,
firm i faces the following choice. It may either cooperate with j or boycott j. When i
cooperates with j two things happen: (i) i’s private information goes into a common pool
that is, it becomes public within the network, (ii) firm j gains access to the pool. When i
boycotts j, (i) no provision to the common pool is made, (ii) j is not given access to the
pool (through i). The pool approach is a simple device to capture the following two basic
features: (i) a firm i has access to network information if and only if at least one network
firm j agrees to cooperate with i, (ii) information is public within the network.
We assume that there is no cost to boycotting a firm. There is, however, a positive per
period fixed cost g of cooperating. This cost does not depend on the number of bilateral
interactions. It may capture the effort of processing one’s private information so that it can
be used by others. When a firm does not contribute (so it saves g) while still interacting
with firms (so it has access to the pool), we say that the firm free-rides. The value of the n
firms’ collective contributions is Sn
p
p
i¼1
i; pi a½; pŠ.13 We define ˆ
ju Sni¼1 i À p as the
value of the pool for the most contributive firm, i.e. the value of the pool net of that firm’s
own contribution.
The bureaucrat chooses between either contributing to the pool, which costs nothing, or
not, i.e. exiting, which is irreversible. In each period, the value of the bureaucrat’s
contribution to the firms is denoted pk, pk >  . There is no strict benefit for the bureaucrat
from being in the network.14 We assume that when he is indifferent between belonging to
the network or not, he chooses to belong.
11 The reasoning extends to the case with more than one bureaucrat.
12 Outsiders only observe collective boycotts, i.e. exclusion (see below).
13 Kadushin (1995, pp. 204 – 205) names four main outcomes from interaction in a network of the French
financial elite: better information, increased opportunity for compromises, promotion of the network’s interest in
politics, promotion of trust.
14 We could also let the bureaucrat earn some benefit from network interaction. This would not modify the
main results.

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A. Lambert-Mogiliansky / European Journal of Political Economy 18 (2002) 47–60
51
Note that, by assumption, the bureaucrat (like the other network members) cannot cash
in on his private information, i.e. there is no money exchange in network interaction. This
feature of the model plays an important role in the analysis. One motivation is that
information, in contrast to favors, is a non-rivalrous good. Therefore, if the bureaucrat
attempted to sell his information, firms would have an incentive to free-ride. Moreover, it
can be shown that in any simple mechanism where the bureaucrat uses a threat to exit to
extract rents from his private information, there exists an equilibrium where the firms
obtain his information for free.15
2.1.1. Network cooperation
The number of possible outcomes of the network game in terms of payoffs is relatively
small. Denote MpN the set of firms currently cooperating with at least one other firm. Let
us also assume that the bureaucrat cooperates. When i is not subject to a collective boycott,
its stage game payoff is
X
Ui ¼
pj þ pk À g;
ð2:1Þ
j a M ; j p i
when firm i cooperates with at least one firm, and Ui ¼ Sj a M; j p i pj þ pk if it does not. If
i is subject to a collective boycott, its payoff reduces to minus g when it cooperates and
zero otherwise. After one period of collective boycott, the firm is disconnected irrever-
sibly.
Let us now assume that all the firms adopt the following strategy. They all cooperate
with each other, i.e. in each of the nÀ1 bilateral relationships unless some firm free-rides.
In that latter case, all the others respond by boycotting the free-rider from the next period
on, i.e. they exclude him. If a firm defects from the boycott, the others respond by ending
all cooperation from the next period on. The network disintegrates. We call d the discount
factor reflecting the players’ common time preferences.
Proposition 1. Cooperation is sustainable with slack whenever D > 0, D u d (P
ˆ + pk ) À g.
Proof. See Appendix.
Comments
The sole problem for cooperation within the network is to secure the firms’ incentives to
incur the cost of making their private information available to others.16 When the threat of
exclusion is stronger than necessary to secure incentives to incur the fixed cost g, we say that
we have an enforcement slack. This slack plays a key role in the analysis. It captures
‘‘punishment resources’’ that are not ‘‘used up’’ to sustain cooperation. The slack might
15 The basic results of the paper would not be affected if we allowed the bureaucrat to extract some rents from
his private information directly.
16 In particular, there can be no issue of firm j bribing firm l to avoid being boycotted. All that j could win is
the access to the pool for 1 period. In contrast, firm l loses access to the pool for all the future. The network
disintegrates in the next period.

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therefore be exploited in a judicious mechanism for other purposes, for example, to sustain
the payment of bribes. Note that, in equilibrium, all the firms cooperate in a single network.17
2.2. The corruption game
An illegal transaction involves two parties, a firm and the bureaucrat. The corruption
game is played within a period and involves the following steps:
1.
The bureaucrat offers a deal, i.e. a favor of fixed value F for the firm in exchange
for a bribe B
ˆ .18
2.
The firm either accepts or refuses the deal.
3.
If it refuses the game ends. If it accepts, the bureaucrat chooses whether to deliver
the favor or not. If he does, he incurs a cost19 C > 0, C < F.
4.
The firm chooses the level of the bribe, and pays B a R+.
5.
The bureaucrat either terminates the relationship. Or he waits until he has a new
favor to offer and, at that time the game starts over from t = 1.
The corruption game between the same two players is infinitely repeated. The
bureaucrat is engaged in at most one corrupt deal per period.20 In each period, the
probability that he offers an illegal favor to any specific firm is assumed to be very small:
corruption is occasional. We denote by e, e < d, the discount factor relevant in the
(bilateral) corruption game (e also captures time preference). As e tends to zero, we
approach the case when the relationship is ‘‘one-shot’’.
Proposition 2. Let B
ˆ be the bribe required by the bureaucrat in his deal offer. Occasional
corruption can be sustained as an equilibrium of the (two-agent) corruption game if and
only if e z (Bˆ / F) and Bˆ z C.
Proof. See Appendix.
Comments
The largest bribe that satisfies the firm’s incentive constraint in the corruption game
above is Bse = e F. As the probability that the bureaucrat will have a favor to offer the firm
becomes small, Bse tends to 0. Hereafter, we assume that C > e F, i.e. the cost of providing
an illegal favor exceeds the self-enforceable bribe. In such a situation occasional corrup-
tion is not self-sustainable.
17 The single network result is consistent with exclusion leading to a zero payoff. We could also consider
situations with a few existing networks and where either switches between networks are very costly or are not
feasible due to, for example, the ‘‘bad reputation’’ following exclusion.
18 Restricting attention to take-it-or-leave-it deals offered by the bureaucrat has no implications for the main
results of the analysis.
19 The cost C captures expenditures related to making the deal hard to detect.
20 This restriction on the bureaucrat’s action set has no implication for the corruption game but it simplifies
the argument of the next section. In particular, it allows a focus on pure strategies in paying bribes and the use of
simple threats (exit). We assume that when the bureaucrat can offer favors to several firms, he randomizes.

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53
A crucial feature in the corruption game above is that the favor is granted before the
bribe is paid, rather than after.21 The following lemma contributes to motivating our choice.
Lemma 1. Consider a situation where the parties agree on a timing before the game starts.
Also assume that there exists a mechanism outside corruption that can enforce bribes but
not favors. Then, the subgame perfect equilibrium of this extended game entails a timing
where the favor is granted before the bribe is paid.
Proof. See Appendix.
The intuition is that no firm ever refuses a deal where the favor is granted first. In
particular, this is true even if the bureaucrat previously cheated, i.e. failed to delivered a
favor that had been paid for. Moreover, the bureaucrat is willing to offer the favor first if
bribes are enforceable relying on a mechanism outside corruption, for example, a
mechanism related to network interaction. Therefore, the firms always require the favor
first and the bureaucrat accepts that timing. Empirical evidence also suggests that the
proposed timing does indeed capture real features of corrupt transactions. It is well known
to professionals that in most East Asian markets for military equipment, the winning firm
pays a ‘‘success fee’’.22 The payment is expected after the agent provided his service (for
example, he tailored the technical requirements, secured favorable evaluation, etc.).23
Another example is one of the key rules proposed by Transparency International (TI is a
NGO fighting corruption). The rule includes an obligation to declare all transactions
between firms and civil servants up to 6 months after the public market has been allocated.
This rules reflects the awareness that (to reduce detection risks) the firm’s payment of the
bribe to the agent often occurs relatively long after the agent performed the illegal
intervention in the allocation procedure that secured the contract to the firm. In a regulatory
context, the issue of ‘‘post regulatory’’ jobs to reward civil servant for lax regulation has
also been addressed in Brezis and Weiss (1997). They investigate how the wage paid in
public-service employment and a ‘‘cooling-off’’ period can be used in tandem to reduce
capture by regulated firms.
As we proceed to consider corrupt transactions in a broader context, we shall make the
following assumptions: (i) All actions within the corrupt game are private information of
the parties. (ii) The parties can, at no cost, exhibit sufficient evidence of their own actions.
Assumption (i) says that corrupt deals are secret. Assumption (ii) guarantees that there
exist equilibria of the whole game with corruption (of the type described above) but
without extortion.24
21 When the favor and the bribe are exchanged simultaneously, both parties have an incentive to cheat. We
are then in a Prisoner-Dilemma situation.
22 This is based on private communication from a French arms dealer (who wishes to stay anonymous).
Similar assessments have been made by other agents engaged in public markets.
23 Interestingly, this example suggests that there might be a moral hazard issue, motivating the ex-post
success fee. Indeed, the official’s effort to ‘‘promote’’ a project is not observable—and not always successful.
24 Assumption (ii) guarantees that firms can challenge false claims. They can either exhibit own evidence or
require that the bureaucrat does so. Otherwise, the bureaucrat would have an incentive to pretend that a firm
cheated even when it paid. He could also falsely pretend that he delivered a favor when he did not.

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3. Enforcing occasional bribes
We now consider the two games described in Sections 2.1 and 2.2 simultaneously. We
also introduce the following new features. At time t = 5 of the corruption game, the
bureaucrat has the additional option to make a valid complaint to the network.25 In the
next period, the firms respond by either boycotting the cheating firm or not. The
bureaucrat then chooses whether to stay in the network or to exit.
Of key significance in the modified game is that the bureaucrat may use the option to
exit (i.e. of ending his contribution to the network) as a (credible) threat to induce firms to
discipline each other, i.e. to punish (by exclusion) the cheating firms. A cheating firm is
defined as a firm that did not honor a corruption agreement, i.e. failed to pay the agreed-
upon bribe after the favor was provided. Our main result here is:
Proposition 3. In an economy where network cooperation between firms is sustained with


ð1 À dÞ
sufficient slack: D > max
C; p
, there exists a subgame perfect equilibrium
ð
k
1 À eÞ
with occasional corruption where all firms j such that kj V pk are offered illegal deals.
Proof. See Appendix.
The intuition is that, as we connect the two games, the enforcement slack on the
network can be used as a punishment resource to secure the payment of bribes. If the slack
(D) is large enough, the level of the enforceable bribe (relying on the threat of exclusion) is
sufficient to establish the profitability of corrupt deals. A condition, however, is that the
cheating firm does not contribute more to the network than the bureaucrat, i.e. pjVpk. In
the opposite case, the other firms could prefer to keep the cheating firm even at the cost of
losing the bureaucrat.26 The bureaucrat’s (credible) threat to exit in response to a single
deviation from the collective boycott forces each single firm to choose between his or the
cheating firm’s contribution.
Comments
The basic point in Proposition 3 is that the firms’ dependance on network information
strengthens the bureaucrat’s retaliation power in corruption. In the absence of a network, the
bureaucrat could be retaliating in both fields, i.e. he could also stop revealing information to
the cheating firm. In the presence of network interaction, however, the bureaucrat cannot
selectively close out one firm because information is public within the network. To be
effective, the punishment must be collective. This very feature opens up for the possibility of
using a much more powerful indirect mechanism. If the bureaucrat can have the firm
excluded, the punishment corresponds to losing all of the network’s information. The crucial
issue is therefore whether the network firms will be willing to administer the punishment. If
25 A complain about cheating is valid if it is truthful. We simply assume that the firms always challenge false
claims which they can do at no cost by Assumption (ii).
26 The condition pk z pj is sufficient. It becomes necessary as e tends to zero. The value of ‘‘keeping’’ the
bureaucrat (while excluding the cheater) reduces to pk À pj, i.e. no future illegal deals are then accounted for.

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A. Lambert-Mogiliansky / European Journal of Political Economy 18 (2002) 47–60
55
the cheating firm’s contribution is not of great value, there are good reasons why the
bureaucrat might actually ‘‘succeed’’ in having the firms punish the cheating member of the
network. Firstly, the corruption equilibrium strictly Pareto dominates the equilibrium with
no corruption, i.e. when the firms refuse to discipline each other. This is because all the firms
have a positive probability of engaging in corrupt transactions in the future. Next, a
remarkable feature is that, in our set-up, the slightest uncertainty (about the others’ play)
selects the corruption equilibrium as the only pure strategy equilibrium.27
How should we interpret this result? The situations we have in mind are the following.
When a bureaucrat complains, he asks other firms to ‘‘exert pressure’’ on the cheating firm to
comply with the agreement. If the cheating firm still refuses to pay, the bureaucrat lets it be
understood that, if that firm is not sanctioned, then he will have to ‘‘look for other partners’’.
If the cheating firm’s contribution is less valuable than that of the bureaucrat, the firms are
likely to coordinate on some sanction that would satisfy the bureaucrat. We know from the
sociology literature that firms are able to coordinate on sanctions (see ‘‘enforceable trust’’,
Kadushin, 1995, p. 204). Similar evidence is provided in the economic history literature. For
example, ‘‘Maghribi traders managed their agency problem by forming coalitions whose
members ostracized and retaliate against agents who violated their commercial codes’’
(Greif et al., 1994, p. 746).
4. Policy implications
A contribution of the analysis is to highlight links between the legal economy
characterized by the enforcement slack D, and the extent of occasional corruption. In a
discussion of policy implications, it is interesting to distinguish between the bureaucrat’s
contribution to the enforcement slack, pk and the firms’ collected contributions. The first
determines the set of firms from which bribes can be enforced, the second affects the type
of deals that can be enforced.
Proposition 4. The larger pk is, the larger the set of firms j, j a M, that can be involved in
occasional corrupt deals.
Proof. According to Proposition 3, occasional corruption is sustainable with any j, j a M
(i.e. j cooperates within the network), provided that pj V pk. Hence, the larger pk is, the
(weakly) larger the set of firms that can be offered profitable corrupt deals.
5
Comments
We interpret pk as a reflection of the opacity of public administration to the firms.
Proposition 4 provides an argument in support of the claim that instability and complexity
are factors that favor corruption. In a country with unstable and complex rules, well-
27 This feature follows from the fact that a single firm’s free-riding from the boycott triggers the bureaucrat’s
exit. In contrast, being the only one to boycott has no effect whatsoever as long as one contributes to the network.
As a consequence, boycotting is a dominant strategy in the relevant subgame (see proof of proposition 3 in the
Appendix).

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informed ‘‘advice’’ from the bureaucrat about how to formulate procurement bids, apply
for a permit, etc., is highly valuable. As earlier discussed (Section 2.1), the bureaucrat may
not be able to directly exploit his private information. Proposition 4 says that, in a context
where the value of the bureaucrat’s private information is large, because the regulatory
environment is unstable and complex, we have reasons to expect that more firms will be
engaged in corrupt deals. It should be stressed that we are dealing with an asymmetry of
information between the firms and the bureaucrat.28
Corollary 1. Improving the provision and the quality of information about the firms’ legal
and administrative obligations and rights can reduce the extent of occasional corruption.
Proof. This follows directly from the fact that the set { j a M; pj V pk, pj a [p, p ]} tends to
F, as pk tends to p.
5
Comments
It can be quite costly to reform laws so as to remove all opportunities for illegal favors.
This may require moving toward a more bureaucratic public administration, i.e. increasing
costly red-tape. Our analysis suggests that an alternative policy, when bribes are enforced
relying on network interaction, may be to provide better information to the firms, i.e. to
reduce the value of pk. This is due to the fact that although there may still exist a stake for
occasional collusion, i.e. C < F, the gain from collusion cannot be obtained. The bribe is
not enforceable. Specific measures include developing information services to the private
sector, for example, free access to ‘‘client friendly’’ publications, public consulting
services, etc. Clearly, moving toward simpler and stable rules is highly desirable.
It should be emphasized that the argument for increasing transparency and promoting
simple stable rules is not that it reduces the opportunities for offering illegal favors, i.e. the
civil servant’s discretionary power. In fact, I am suggesting that one can reduce corruption
while preserving flexibility (and thus discretionary power) in public administration. The
argument for increasing transparency is that it contributes to tightening the enforceability
constraint.
Proposition 5. Let C a [C , C] be the cost of providing favors. Then, the smaller the
firms’ collective contribution to the network, the lower the level of occasional corruption.
Proof. In the proof of Proposition 3, we show that a firm j, pj V pk, prefers to pay its bribe
ð1 À eÞDÃ
B
ˆ rather than to cheat if ˆBV
þ eF;
DÃ ¼ dðSn p
ð
iÞ À g. Let an illegal favor x
1 À dÞ
i
ð1 À eÞDÃ
be such that Cx a [ C, C] , Cx ¼
þ eF. Since DBˆ/DD*>0, we have that when D*
ð1 À dÞ
diminishes (because the pi(s) go down), favor x cannot longer be the object of an
occasional corrupt deal. The largest bribe that satisfies the firm’s incentive constraint
does not cover the cost Cx.
5
28 In contrast, asymmetry of information between the principal and the bureaucrat creates discretion to
provide illegal favors. The asymmetry in information bears then on firm specific data, relevant to how the rules
should be applied. This asymmetry is addressed in the theory of regulatory capture (Laffont and Tirole, 1993).

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Document Outline

• Why firms pay occasional bribes: the connection economy
  • Introduction
  • The setting
    • Network interaction
      • Network cooperation
    • The corruption game
  • Enforcing occasional bribes
  • Policy implications
  • Concluding remarks
  • Acknowledgements
  • References

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