A Dynamic Managerial Theory of Corruption and Productivity Among Firms in Developing Countries

In this paper, a simple dynamic model of efficient firm-level managerial resource allocation to two uses, one involving productivity activities and another one involving corruption activities to “get things done” was developed. The model follows the optimal control theory process. Two operational equations are derived representing firm growth and shadow-price behavior. Firm-level interview data on surrogates for the firm’s inputs was used for domestically owned firms in developing economies covering two time periods. The SUR method was used to estimate jointly the two equations. Overall, the model fit the data quite well. It was found that the managerial surrogates; namely, capacity utilization, formal worker training, and the time spent dealing with government regulations, were positive and significant predictors of firm output growth and the shadow-price of its capital with a few negative exceptions. Implicitly, there appears to be a trade-off between managerial resources used for growth and those used for the shadow price. Policy implications were discussed briefly.