Corruption and competition for resources

Abstract

An increasing share of world FDI is carried out by multinationals from developing countries. These investors may have objectives and constraints that differ from their developed country counterparts. In this paper we focus on differences in attitudes to corruption, and how these may shape the competition for the right to extract resources in a developing country context. We show how differences in the investors level of technology and differences in the host country government's trade-off between bribes and taxes determine who wins the competition for the resource and the winning price. We find that the entry of a corrupt investor may induce the honest investor to offer bribes instead of taxes. Surprisingly, however, our analysis also demonstrates that under some conditions, the entry of a corrupt investor may in fact induce the honest investor to increase its tax payments.