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Cuervo-Cazurra, A. 2014. Corruption. In Cooper, C. (Ed.), Wiley Encyclopedia of
Management. 3rd edition. Marblehead, MA: John Wiley & Sons.
corruption1
Alvaro Cuervo-Cazurra
Corruption• is commonly• defined as the abuse
Q1
of public power for private gain. This article
Q2
analyzes corruption in government, which
happens when a civil servant or politician abuses
his or her position in government to obtain a
bribe in exchange for providing a good whose
costs are borne by the government. Corruption
in companies, which happens when employees
misuse their position in the company’s hierarchy
to obtain private benefits, is usually discussed
as part of white collar crime in corporate
governance and is not reviewed here.
There are several classifications of corruption:
(i) Corruption to deviate from the application of
existing rules or laws, versus corruption to
change existing rules or create new rules or laws.
(ii)Corruption without theft, when the offi-cial
provides the government with the price of the
good (e.g., license fee) and only keeps the bribe,
versus corruption with theft, when the official
keeps both the price and the bribe. (iii)
Organized corruption, when the payment of the
bribe results in the delivery of the goods, versus
disorganized corruption, when the payment of
the bribe does not ensure delivery. (iv) Petty
corruption, when civil servants demand small
bribes in exchange for accelerating permits or
waiving regulations, versus grand corruption,
when politicians allocate contracts or subsidies
to the firm that pays a bribe. (v) Pervasive
corruption, when the firm encounters corrup-
tion whenever it deals with government officials,
versus arbitrary corruption, when the firm faces
uncertainty regarding the request for and type
of bribe.
Corruption exists not only because govern-
ment officials have incentives to demand bribes
but also because managers in firms have incen-
tives to supply them. Whenever an official has
discretion over the allocation of a ‘‘good’’ (e.g.,
contract, permit) or the avoidance of a ‘‘bad’’
(e.g., taxes, regulation) to the private sector,
the official has an incentive to demand a bribe.
The bribe increases the official’s income, while
the good exchanged has little cost to him or
her because it is owned by the government.
A manager in a company has an incentive to offer
a bribe to a government official to obtain benefits
that would not be obtainable without corrup-
tion, such as being given a contract without
competitive bidding, or avoiding compliance
with regulations.
There are two views of corruption, one posi-
tive (corruption as grease) and another nega-
tive (corruption as sand). Leaving aside ethical
considerations, corruption can be seen positively
as ‘‘grease in the wheels of commerce’’ because
it facilitates transactions and accelerates proce-
dures that would otherwise occur with more
difficulty, if at all. In this view, corruption intro-
duces competition into a monopolistic setting.
Officials expedite procedures in order to serve
as many customers as possible and obtain more
bribes. Investors who value time or access to a
good more than others will pay a bribe.
However, the dominant view on corruption
is negative: ‘‘sand in the wheels of commerce.’’
Government officials create additional and
unnecessary regulations and bureaucratic
requirements to generate opportunities for
demanding bribes, which increases costs to
companies. Costs increase because corruption
requires managers to devote human and finan-
cial resources to manage and pay bribes; these
resources could be invested more profitably
elsewhere. The payment of a bribe creates
uncertainty because it does not ensure that the
promise is fulfilled. The government official can
demand additional bribes, further increasing the
cost to the firm, without delivering the goods.
Unlike with contracts, managers cannot use the
courts to force government officials to fulfill the
promise and deliver the goods, because bribery
is illegal.
Although the government official pocketing
the bribe and the company receiving a good in
exchange may benefit, corruption has a detri-
mental influence. Countries with higher levels
of corruption tend to have weaker growth, lower
investment, lower investment in education and
healthcare, and lower foreign direct investment.
Corruption increases the costs of operating in
the country and reduces profits. It also creates
a burden on citizens who have to pay more for
basic services.
Most studies use subjective measures of
corruption; it is difficult to measure corruption

2 corruption
with precision because it is illegal. One
commonly used measure is the corruption
perception index of the German nongovern-
mental organization Transparency Interna-
tional. The measure, based on information from
multiple surveys, is available on an annual basis
since 1995, and uses an interval of 10 (low
corruption) to 0 (high corruption). Additionally,
Transparency International publishes a bribe
payer’s index that measures who is most likely
to pay bribes abroad, and a global corruption
barometer that measures bribes paid by citizens.
Another widely used measure is the indicator
of the control of corruption of the multilateral
organization The World Bank. This measure,
which is part of a set of six Governance Indi-
cators based on multiple surveys, is available
every other year from 1996 and annually from
2002 onward, and uses a standardized indicator
in an interval of –2.5 (low control of corruption)
to 2.5 (high control of corruption). Other
measures of corruption are available from the
Swiss organization World Economic Forum in
its Global Competitiveness Report, and from
the Enterprise Surveys of The World Bank.
Solutions to corruption can address the
demand of bribes by government official or the
supply of bribes by companies and individuals.
Solutions that reduce the demand of bribes
by government officials can be grouped into
two areas: those that reduce the opportunity
for corruption and those that increase the cost
of engaging in corruption. First, to reduce
the opportunity for demanding a bribe, the
government can limit an official’s intervention
and discretion, decentralize decision-making and
actions, and increase transparency in the official’s
actions and decision-making via reviews and
controls. Second, to increase the cost of engaging
in corruption, and thus deter demanding a
bribe, the government can increase the prob-
ability of being caught and the level of punish-
ment if caught. The government can create
an independent corruption investigator with
the power and resources to start investiga-
tions at all levels, and can increase transparency
in government–private sector interactions, with
open bidding and hotlines for whistle blowers. In
many cases, a free press discovers acts of bribery
and misbehavior by government officials. Addi-
tionally, to increase the level of punishment and
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deter demand, the government can increase the
maximum penalties, imposing not only fines and
the repayment of ill-gotten gains but also exten-
sive jail term. Reform of the judicial system to
ensure that the laws are properly applied and
judges are not bribed is also needed.
Solutions that reduce the supply of bribes by
firms and their employees can be grouped into
two areas as well: those in which the company
limits the ability of employees to supply a bribe
and those in which the government increases the
cost to employees and companies who supply a
bribe. First, a company can establish codes of
conduct that clearly define the behavior expected
from employees, banning the payment of bribes
to achieve a business advantage. These codes
of conduct can follow the guidelines provided
by, for example, Transparency International,
the United Nations’ Global Compact, or the
Organization for Economic Cooperation and
Development (OECD) principles for multina-
tional enterprises. Additionally, the company
can establish controls and practices that limit
the ability of employees to misuse funds to
pay for bribes, such as requiring permission
for payments above certain levels, prohibiting
potentially problematic payments such as dona-
tions to political parties, establishing reporting
guidelines for tracking down payments and
cash management, and providing procedures
for bidding on government contracts that limit
employee discretion.
Second, the government can create and imple-
ment laws that forbid and punish the supply
of bribes, complementing laws that forbid and
punish the demand of bribes. All countries have
laws that forbid and punish bribery, but in coun-
tries with high corruption these laws may not be
effective, as the government officials writing the
laws and the judges implementing them may also
be bribed. Hence, an alternative is to reduce the
supply of bribes by foreign investors by imple-
menting laws against bribery abroad in the
home country. These laws can be an effective
deterrent because the largest foreign investors
tend to come from coun-tries with low
corruption and effective judicial systems; these
multinational companies would find it harder to
bribe politicians and judges at home to not
implement the laws.

The most notable legal efforts to reduce the
supply of bribes are the US Foreign Corrupt
Practices Act (FCPA), and the laws
implemented in countries that ratified the
OECD Conven-tion on Combating Bribery of
Foreign Public Officials in International
Business Transactions.
The FCPA, passed in 1977, made the United
States the first country to ban companies from
bribing abroad. It has three main requisites:
accurate record keeping, effective internal
accounting control systems, and prohibition of
corrupt payments to foreign officials, politicians,
and political candidates. The FCPA bans not
only direct payments to foreign officials or
politicians, but also payments to facilitate agents
who would pay the bribe on the firm’s behalf.
The FCPA does not penalize ‘‘grease
payments,’’ or payments to foreign officials to
expedite procedures, such as customs
procedures or permits, that would otherwise
occur without a bribe, but more slowly.
Although grease payments are illegal in the
United States, legislators considered them an
accepted business practice in other countries. A
firm can ask the opinion of the Attorney General
regarding whether a future payment conforms
to the FCPA. In 1998, the FCPA was reformed,
increasing penalties but reducing standards.
Managers were no longer required to have
‘‘reason to know’’ that payments given to an
agent would be passed on as a bribe. Instead,
they had to ‘‘know’’ that such illegal
payments were done. The FCPA applies to the
US companies and to companies that are quoted
in the US capital markets.
The OECD Convention, signed in 1997 and
ratified in 1999 by the member countries of the
OECD and five additional nonmembers, sets a
general framework that criminalizes bribing
foreign government officials and officials of
inter-national organizations to provide the firm
with an improper advantage, but does not
prohibit ‘‘grease payments.’’ The Convention
requires stricter accounting standards, external
auditing, and internal controls, and encourages
mutual legal assistance in investigations and the
facilita-tion of extraditions. A companion
agreement disqualifies bribes from being tax-
deductible
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corruption 3
business expenses. As the OECD does not have
the ability to prosecute companies that break
the Convention or countries that do not enforce
the laws, it uses a ‘‘name and shame’’ process
to pressure governments to introduce legisla-
tion and implement it. The OECD, through its
Working Group on Bribery, monitors the imple-
mentation of the Convention’s standards by each
signatory country.
ENDNOTES
1 * Parts
of this entry are derived from Cuervo-
Cazurra (2006, 2008). Other good reviews
and analyses of the topic are Bardhan (1997),
Elliot (1997), Rose-Ackerman (1999, 2006),
Rose-Ackerman and Soreide (2011), Shleifer
and Vishny (1993), and Svensson (2005). I thank
the Robert Morrison fellowship at Northeastern
University for financial support. All errors are
mine.
Bibliography
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review of issues. Journal of Economic Literature, 35,
1320–1346.
Cuervo-Cazurra, A. (2006) Who cares about corruption?
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Cuervo-Cazurra, A. (2008) The effectiveness of laws
against bribery abroad. Journal of International Busi-
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Elliot, K. (ed.) (1997) Corruption and the Global Economy,
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Rose-Ackerman, S. (1999) Corruption and Government,
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