Anti-corruption regulations for promoting socially responsible practices

Associate Professor Srividya Jandhyala, ESSEC Business School, Singapore; Associate Professor Fernando S. Oliveira, Graduate School of Management, University of Auckland

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Background

Firms regularly encounter pressure to engage in corrupt and fraudulent practices in the course of their operations, in supply chain management activities, and in procurement auctions. In particular, corruption – the abuse of public power for private gain – is considered to be the norm rather than the exception around the world, and is highly unreported and difficult to track. In recent years, regulatory efforts at tackling corruption have changed in two significant ways. First, international anti-corruption regulations hold firms accountable in their home country for behavior in foreign countries.

Results

We analyze how firm heterogeneity, within two firm types (domestic and multinational) influences the behavior of the industry and the short and long-term strategies of the firms using an agent-based model, which is able to accommodate firms with different objective functions. The simulation converged to the neighborhood of the Nash equilibrium. In terms of the speed of convergence of the agent-based simulation to the Nash equilibrium it can be faster or slower depending on the prior knowledge of players regarding the optimal strategy.

In other words, contrary to domestic laws, international regulations monitor and penalize actions of a firm in a foreign location, where the government does not traditionally have jurisdiction. Policymakers contend that these changes in anti-corruption efforts are a major breakthrough in the fight against corruption, emphasizing the de facto enforcement of these regulations to lower corruption in host countries.Multinational firms headquartered in developed countries with stronger judicial system and greater resources for monitoring and sanction would have lower incentives to offer bribes in developing countries.

We have also considered the impact of uncertainty on the players’ optimal bribing strategies. The major result is that the Nash equilibrium, when uncertainty is low, is a robust predictor of the actual behavior of firms in the conditions described in the game. Even though in the agent-based game the decision space is composed of binary decisions and based on learning, very different from the game theory setting, the optimal strategy, nonetheless, remains the same.

Heterogeneous firms learn the optimal bribing probability.

Impact of parametric uncertainty on the optimal bribing probability.

Conclusions

In particular, in some cases the strategic response of domestic firms may well be to increase their own bribing behavior when competing with multinational firms whose actions are exposed to greater monitoring and sanction through international rules and regulations, even if the overall industry bribing probability declines. Thus, increasing bribe penalties for multinational firms can have an adverse impact on domestic firms’ bribing behavior if they face consistently lower penalties. Better monitoring and increased penalties on multinational firms through international anti-corruption initiatives may be insufficient in constraining bribing behavior.

Notwithstanding the increasing emphasis in the literature on the impact of ethically and socially responsible behavior on firm performance, we find in some instances – such as the benefits from corruption rents in our model – the relationship may not be straightforward. Thus, future work should critically examine the setting in which market and institutional mechanisms can be better coordinated to generate positive social outcomes.