How can corruption affect corporate behaviour? : a two-stage game theory model approach

Abstract

This paper rationalizes the behaviour of decision makers within several countries where such behaviour is mainly non-existent or illegal. In particular, we study the Telecom Corruption Scandal in 2012 and build a two-stage game theory model specifically to that event in order to justify the decisions made by the agents involved. The first model examines the behaviour of a single decision maker engaging in corrupt activities. We study the optimal bribery amount the decision maker are willing to pay and found that for such optimal level there exists no equilibrium where a moral type finds it attractive to invoke corrupt behaviour. Next, we extend our model in which we include a second firm and study the impact of such inclusion. We found that the involvement of a second firm serves as a risk sharer and hence, under some certain assumptions we found that there exists a unique equilibrium in which both enterprises finds it optimal to bribe and engage in corrupt activities. Such equilibria might only exist between companies from countries with similar Corruption Perception Index (CPI), as when the scores deviate significantly from each other either in nature or through dynamic changes, we might instead arrive at corner solutions. We found the derived models applicable to the Telecom Scandal, but further rigorous analysis and discussions can be made to improve the model. Additionally, we describe factors that the model cannot explain which may influence the outcomes. In total, we provide evidence for the existence of corporate behaviour that are not fully in-line with classic economic models, and we rationalize such behaviour by defining and including new decision variables we find crucial to clarify such phenomenon. Keywords - Telecom Scandal, Corruption, Game Theory, Corruption Perception Index, Optimal Bribe Amounts