Can corruption really function as “protection money” and “grease money”? Evidence from Chinese firms

This paper directly investigates the “grease money” and “protection money” effects of corruption based on Chinese firm survey data. First, we identify a significantly positive effect of bribes on firm profitability only for non-state-owned enterprises (non-SOEs). Further empirical analysis shows that this positive effect mainly exists in less contract-intensive industries and simple goods industries. Then we find that corruption functions as “protection money” for non-SOEs by showing that bribes can lower effective tax rates. We further show that bribes can help non-state firms circumvent red tape and increase their probability of obtaining government procurement contracts, thus validating the “grease money” hypothesis. Our results suggest that both effects of corruption exist for non-SOEs in China, thereby identifying a new profit-enhancing factor in the non-state sector in recent years.