Even well-intentioned multilateral regulatory regimes can produce unintended consequences. In fact, when regimes successfully limit certain behaviors from some actors, they can incentivize these same behaviors from other actors—a phenomenon called “regulatory leakage.” As noted by Jensen and Malesky (2018), for example, while the creation of OECD’s Anti-Bribery Convention (ABC) decreased bribery among firms from member countries, bribery increased among firms from non-member countries. Shockingly, this increase was high enough to offset the reduction from ABC-subject firms.
To explain why the OECD ABC agreement had such a profound effect on firms outside the agreement, researchers turned to game theory and prior survey data gathered from the Vietnam Provincial Competitiveness Index (PCI). The model developed demonstrates that when companies make entry decisions, they must consider not only their own costs for entry but also their beliefs about those costs for other companies. As the likelihood of being caught and punished increases, those under regulation (because their country’s leaders signed the OECD ABC) become less likely to enter, creating entry space for firms unregulated firms. The model, as well as the survey data, also demonstrates how the level of monitoring and enforcement in a firm’s home country impacts the decision to avoid punishment by bribing through an intermediary. In the end, the research spotlights the shortcomings of even an effective treaty such as the ABC and suggests being inclusive of all parties at the design stages.
Methods & Results
The paper uses survey data from the Vietnam Provincial Competitiveness Index (PCI) of firm managers, conducted in eight waves from 2010 to 2017. This annual survey of over 1,500 investors in Vietnam provides a nationally representative sample of foreign investment in Vietnam. Vietnam, a non-signatory country, was chosen because of the wealth of data the PCI provides and its position as a host to foreign investment from a diverse set of home countries, including both ABC signatories and non-signatories.
Additionally, the paper uses a formal model of market entry in which (a) rents dissipate as the number of entrants increases and (b) firms can enter either cleanly or via bribery, the latter of which ensures access at an additional upfront cost. It also considers two extensions. The model allows a certain number of firms to be subject to an anti-bribery treaty, like the OECD ABC, and allows subject firms the option to subcontract with a non-subject firm that can pay an entry bribe.
This game-theoretic model provides a mechanism to explain how firms that do not fall under the jurisdiction of a treaty are affected. In equilibrium, factors that increase the marginal cost of entry for a group of actors—even in expectation—can incentivize entry for other actors. Looking at the survey data, the ABC appears to have done just this. By creating an effective form of peer review enforcement, the agreement raised the costs of “paying to play” for subject firms. This increased cost reduced opportunities for subject firms, yet increased the opportunity of acquiring rents for non-subject firms, incentivizing them to pay to play even more. While these results appear negative, it does not mean that ABC is a failure. Rather, these findings highlight that there are limits to the effectiveness a treaty like ABC can have on illegal activity. The PCI data findings and the model suggest that to reduce regulatory leakage efforts, regimes should include as many relevant parties as possible and strengthen enforcement procedures for signatories from the designing stages.
Edmund Malesky (Duke University), Terrence L. Chapman (The University of Texas at Austin), Nathan M. Jensen (The University of Texas at Austin), Scott Wolford (The University of Texas at Austin)
Economic Governance, Global Value Chains, Governance, Vietnam