Proximity and inter-firm corruption: A transaction cost approach

The aim of this study is to analyse inter-firm corruption and to ascertain whether the proximity of firms engaged in corruption is a significant factor. We draw on transaction cost theory to explore two forms of corrupt exchange (negotiated vs. productive) and the role of proximity in reducing transaction costs. We obtained original data from the judgements of the Italian Court of Cassation and clustered homogeneous proximities. We then used separate binomial logistic regressions to show how the relation between transaction properties, the consequences for transaction costs and forms of corrupt exchange lead to different outcomes for each subgroup of proximities. The results show that technological and geographical proximity are beneficial to both forms of exchange, leading to a reduction in exchange costs, in much the same way as legal activities. However, unlike legal exchanges, corrupt and in particular productive exchanges do not appear to benefit from social proximity. Plain English Summary The level of corruption among firms is underestimated, although it distorts competition. We apply transaction cost theory and examine the choice between two forms of corrupt exchange in situations of inter-firm proximity. Starting from the assumption that the main objective of a rational agent is to minimize costs, we adopt the following key concepts to examine how firms choose between these forms of exchange. First, corrupt exchanges are assumed to have specific transaction costs, that can be detection or enforcement costs. Second, these costs have an impact on the choice between the two forms of exchange as they can reduce their effect to different degrees. Third, proximity can further minimize the remaining costs, regardless of the choices made. Our results show that technological and geographical proximity can mitigate the costs of corrupt transactions, both in negotiated and productive exchanges and thus have an effect similar to those of legal activities. However, in contrast with legal exchanges, social proximity does not appear to be a reliable governance mechanism for corrupt exchanges, particularly in the case of productive exchanges. Our study has implications for judicial and investigative bodies. The types of proximity draw a map on which corrupt exchanges can be traced, enabling the advantages to be identified.

Automated summary

This study analyzes inter-firm corruption and the role of proximity in reducing transaction costs using transaction cost theory. The results show that technological and geographical proximity benefit both forms of exchange, reducing costs, while social proximity does not appear to benefit corrupt exchanges.