Tariffs and corruption: evidence from a tariff liberalization program

This paper investigates how corrupt public officials and firms adjust to policy reforms that change opportunities for bribery deals to take place. I take advantage of an exogenously determined tariff liberalization program that altered opportunities to extract bribes through a particular method -“selling” tariff evasion-, to study how changes in tariff levels affected the incidence, the distribution, and the level of bribes paid during different stages of the process of importing goods. The reduction in tariff rates was associated with a significant decline (60%) in bribe payments to customs officials for tariff evasion. This was however partially offset by the displacement of corruption into more coercive forms of bribe extraction. I provide suggestive evidence on how these displacement effects can be economically costly given that firms respond to changes in bribe patterns by adjusting their decisions to source inputs domestically or internationally. While all firms increase imports in response to the tariff reduction, firms experiencing an increase in the probability of paying a coercive bribe following the tariff change are relatively more likely to source inputs domestically, with significant implications for firm performance. These unintended effects of policy reform highlight important policy complementarities in the design of trade and anti-corruption policies.