This paper contributes to the corruption literature by implementing bribery in the laboratory as a dynamic three person sequential game with a focus on social inefficiency and citizen response. In contrast to the design of Abbink (2002) and Cameron et al (2006), our design holds bribe-bargaining mechanisms constant while allowing citizen punishment to vary. Subjects are placed into roles of the firm, government official and citizen respectively, with the firm as first mover initiating the bribe, the official is given the choice of accepting or rejecting, and finally the citizen is able to punish either of the two other players. The experiment consists of two treatments, one with citizen punishment and one without. Experimental sessions were conducted at the University of Texas at Dallas in early Spring 2008, and at the Institute of Business Administration in Karachi, Pakistan, in early Fall 2008. The laboratory environment serves as a useful tool in studying the nature of bribery, and significantly improves upon the aggregate level survey data on corruption perceptions commonly used in corruption analysis. This bribery game allows us to study the number of bribes sent and accepted across cultures, as well as responses of citizens when viewing the bribery activity in the lab. Differences in punishment levels, then, serve as an instrument for the “blame” put on the parties engaged in a corrupt act. Furthermore, the number of bribes sent and accepted act as an instrument for the pervasiveness of bribery in the two cultures. This methodology diverges from earlier cross-national studies in order to show the differences between strong and weak institutions, and the impact of corruption pervasiveness on citizen response to observed bribery at the micro level. We show that in the U.S., the citizens punish the firms slightly less than the government officials across all rounds where successful bribes have occurred, while in Pakistan the firms are punished significantly more than the officials. Furthermore, punishment reduces successful bribes in both cases, though in Pakistan bribe rejections increase while no bribing outcomes increase in the U.S. Overall, firms in Pakistan are punished higher than officials on average; and punishment has virtually no effect on the percentage of bribes offered. In the U.S., however, punishment is shown to lower both the proportion of bribes offered and accepted. Officials in both cultures are sensitive to punishment with U.S. “officials” slightly less resistant. We conclude that the presence and acceptability of corruption leads to a dearth in the accountability of officials such that the presence of bribery is attributed to the initiators of bribes rather than the executors of the consequences of bribery itself. This allows us an insight into how corruption affects institutions and thusly, how corruption can become self-enforcing over time
