Special Issues in the Analysis of the Public-Private Nexus

Annex 2. Special Issues in the Analysis of the Public-Private Nexus

209. This Annex presents some of the empirical challenges of the econometric analysis presented in Chapter 4, and present further country-specific regressions explaining the decision to make political party contributions, join business associations, and lodge complaints. The empirical challenges fall into three groups: issues related to the self- reporting of sensitive data such as bribery, bias in some of the geographic measures, and

issues of comparability of the data across surveys. Here we describe how we try to address these challenges.

Self Reporting 210. The data used to estimate the model is based on information which was reported

by the firm. One obvious limitation of the use of self assessments is that the coefficients obtained in estimating the model might be subject to respondent bias, a problem which is

discussed in detail in Chapter 3. In the present case, this problem is most likely to become manifest in the willingness of the firm to honestly report bribery. Less open or less honest managers may be less likely to reveal their own corruption, so that a key dependent variable BRIBE (a dummy variable equal to one if a firm has paid a bribe) may be biased downward. Econometrically, this would amount to an omitted variable problem, in which a person’s openness or honesty is unobserved and consequently omitted from the specification. In a limited dependent variable model, such as the one considered here, an omitted variable will result in biased estimates of regression parameters, even if the omitted variable is uncorrelated with any of the right-hand variables. To try to address this problem, we include the variable on the right- hand side of the equation, as a proxy for a manager’s willingness to discuss sensitive matters openly and honestly. This variable – COMMIT – is an evaluation of a five-point scale of government’s commitment to anticorruption. We anticipate that a manager who is reluctant to openly discuss corruption might also be reluctant to openly criticize the government’s commitment to anticorruption. To the extent this is true, the two variables will be correlated and COMMIT can reasonably be expected to control for this type of respondent bias. Note that, in other regressions where the dependent variable is not as sensitive a variable as the decision to pay a bribe, COMMIT does not need to be interpreted as a proxy for the honesty of the respondent.

Bias 211. Four of the geographic variables are subject to a second type of bias that warrants

discussion. These are the variables that measure the share of other firms in a region that resort to bribery (R_BRIBE), make party contributions (R_PARTY), join business associations (R_ASSOCIATION), and lodge formal complaints (R_COMPLAINT). By excluding the firm’s own behavior in the calculation of the regional variables, we can rule out any objections of endogeneity and focus squarely on the effect of spillovers of the behavior of other firms on the decisions of the firm.

212. Notice however that this approach produces a slight negative bias in the relationship between the behavior of the firm and the behavior of other firms in the region. To better understand this, consider the example presented in Table 29 of three hypothetical regions. The example examines the relationship between BRIBE and R_BRIBE, although the same example could be constructed for any of these variables. There are 100 firms in each region. In region A, 99 engage in bribery; in region B, 50 engage in bribery; and in region C, only one engages in bribery.

Table 29. Hypothetical Example of Bribery in Three Regions

Value of R_BRIBE for Region

Number of Firms with

Value of

Given Value of BRIBE

Firms with Given Value

of BRIBE Region A: high level of bribery

BRIBE

1 99 .99 0 1 1 Region B: equal bribery and

1 50 .49 integrity

0 50 .51 Region C: high level of

1 1 0 integrity

213. First, consider any single region. The measurement technique causes the correlation between BRIBE and R_BRIBE within the region to be negative. Now consider all three regions together. The high concentration of corrupt firms in region A and honest firms in region C causes the correlation between BRIBE and R_BRIBE to be positive. Hence, while there is a slight negative bias in the measurement of this type of

variable within regions, strong differences between regions in the share of firms using a particular instrument will allow us to capture the effect of spillovers in behavior.

Data Comparability 214. Data comparability is almost always an issue in cross-country studies, whether it

is explicitly stated or not. This analysis is no exception. In most cases, the language used in the surveys to collect the data in the three countries is identical or nearly identical. To

the extent possible, we have tried to restrict our use to data that are directly comparable. However, several of our critical variables were specified slightly differently across the three countries, as described below.

215. Bribe . The variable BRIBE is a dummy variable equal to one if a firm admitted to paying a bribe. The issue with this variable is the time period the firm was asked to

consider. In Romania and Slovakia, firms were asked if they had paid a bribe during the past three years, while in the Kyrgyz Republic firms were asked if they had paid a bribe during the past one year. Despite the shorter time period, about 25 percent more firms in the Kyrgyz Republic reported that they paid bribes than in either of the two other countries. If corruption has decreased dramatically in the Kyrgyz Republic during the past three years – so that a firm that paid a bribe two or three years ago is less likely to pay a bribe this year – then it may be the case that we underestimate the probability that a firm has paid a bribe during the past three years. On the other hand, if corruption has consider. In Romania and Slovakia, firms were asked if they had paid a bribe during the past three years, while in the Kyrgyz Republic firms were asked if they had paid a bribe during the past one year. Despite the shorter time period, about 25 percent more firms in the Kyrgyz Republic reported that they paid bribes than in either of the two other countries. If corruption has decreased dramatically in the Kyrgyz Republic during the past three years – so that a firm that paid a bribe two or three years ago is less likely to pay a bribe this year – then it may be the case that we underestimate the probability that a firm has paid a bribe during the past three years. On the other hand, if corruption has

216. Complaint. The variable COMPLAINT is a dummy variable equal to one if a firm has lodged a complaint about corruption. The issue with this variable concerns the grammar used in the survey question. In the Kyrgyz Republic and Romania, firms were asked if they have reported corruption in the past; in Slovakia they were asked whether they would have reported corruption, if they had encountered it. Naturally we expect that some firms in Slovakia might overstate their willingness to report corruption, although we hope that firms actually based their response on their past behavior. Interestingly, the share of firms that reported corruption is remarkably similar across countrie s (between eight and 10 percent) and, as we discuss in Chapter 4, quite uncorrelated with the availability of complaint systems. Given the very low level of firms in Slovakia that said that they would have reported corruption, we trust that the amount of overstatement was small.

217. Commit. The variable COMMIT is an evaluation by the manager of the commitment of the government to anticorruption. The issue with this variable concerns its scale. In the Kyrgyz Republic, firms were asked to evaluate the government’s commitment to anticorruption on a five-point scale. In Slovakia, they were asked to evaluate it on a four-point scale. And, in Romania, they were asked to evaluate firms on

a three-point scale. We explored several different methods of rescaling the variables, all of which produced virtually identical empirical results. In the end, we used what in our view was the simplest approach, which was to rescale the variable in each country to be between 0 and 1.

218. Our approach to addressing these types of data differences across countries is to treat it as measurement error. We acknowledge that such differences might cause the error terms within each country to be correlated. For this reason, as well as the possibility that there may be some country-specific omitted variables, we assume, for the cross-country regressions, that the error terms might be correlated within countries. In addition, we estimate the model separately for each country. While this does not resolve the problem of the comparability of results across countries, it does eliminate this type of measurement error from the actual estimation.

Country-Specific Regressions Explaining the Decision to Make Political Party Contributions, Join Business Associations, and Lodge Complaints

Table 30. Explaining the Decision to Make a Political Party Contribution in the

Kyrgyz Republic

Food processing

(1.44) M_Age

(0.30) Political instability

(0.09) Unfair competition

-0.883 (3.07)*** (2.99)*** (2.83)*** (3.06)*** (3.09)*** R_Bribe

R_Party

R_Association

R_Complaint

R_Court 1.846 (3.76)*** Constant

361 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%; N/A indicates the independent variable predicts the dependent variable perfectly

Table 31. Explaining the Decision to Make a Political Party Contribution in Romania

(1.26) Food processing

(0.79) M_Age

(0.30) Political instability

(0.34) Unfair competition

(0.15) R_Bribe

R_Party

R_Association

R_Complaint

R_Court -1.529 (1.03)

265 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%; N/A indicates the independent variable

predicts the dependent variable perfectly

Table 32. Explaining the Decision to Make a Political Party Contribution in the Slovak Republic

(0.76) Food processing

(0.05) M_Age

(1.22) Political instability

(0.65) Unfair competition

(1.36) R_Bribe

R_Party

R_Association

R_Complaint

R_Court 4.223 (1.43)

280 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%

Table 33. Explaining the Decision to Join a Business Association in the Kyrgyz Republic

Food processing

(2.86)*** M_Age

(0.38) Political instability

(3.23)*** Unfair competition

(1.22) R_Bribe

R_Party

R_Association

R_Complaint

R_Court -0.550 (0.40)

348 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%; N/A indicates the independent variable

predicts the dependent variable perfectly

Table 34. Explaining the Decision to Join a Business Association in Romania

(1.15) (1.32) Food processing

(0.66) (0.82) M_Age

(6.51)*** (5.54)*** Political instability

(0.24) (0.07) Unfair competition

(0.20) (0.01) R_Bribe

R_Party

R_Association

R_Complaint -3.822 (0.59)

R_Court 2.853 (3.08)*** Constant

301 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%

Table 35. Explaining the Decision to Join a Business Association in the Slovak Republic

(1.91)* (1.78)* Food processing

(0.49) (0.43) M_Age

(3.01)*** (3.00)*** Political instability

(1.74)* (1.69)* Unfair competition

(0.37) (0.37) R_Bribe

R_Party

R_Association

R_Complaint -2.433 (1.09)

R_Court 1.768 (0.83)

280 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%

Table 36. Explaining the Decision to Complain in the Kyrgyz Republic

Food processing

(0.17) (0.21) M_Age

(0.88) (0.97) Political instability

(1.26) (1.41) Unfair competition

(0.22) (0.20) R_Bribe

R_Party

R_Association

R_Complaint

R_Court 0.340 (0.77)

348 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%

Table 37. Explaining the Decision to Complain in Romania

(0.50) (0.53) Food processing

(4.54)*** (4.37)*** M_Age

(2.46)** (2.61)*** Political instability

(3.06)*** (2.98)*** Unfair competition

(1.64)* (1.59) R_Bribe

R_Party

R_Association

R_Complaint

R_Court -0.380 (0.28)

303 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%

Table 38. Explaining the Decision to Complain in the Slovak Republic

(0.25) (0.51) Food processing

(3.81)*** (4.15)*** M_Age

(0.57) (0.67) Political instability

(0.51) (0.29) Unfair competition

(0.16) (0.32) R_Bribe

R_Party

-0.800

(0.78)

R_Association

-1.708 (1.65)*

R_Complaint -8.850 (1.24)

R_Court 0.182 (0.09)

280 Estimated using probit; errors are allowed to be correlated within regions; robust z statistics in parentheses; *significant at 10%;** significant at 5%; *** significant at 1%

280

280

280

280