Firms in developing countries often avoid paying taxes by making informal payments to
tax officials. These bribes may raise the cost of operating a business, and the price charged
to consumers. To decrease these costs, the researchers designed a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. They show theoretically that feedback incentives decrease the equilibrium bribe amount, but make firms facing a more inelastic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe amount to a lesser extent.
They evaluate both schemes in a field experiment in the Kyrgyz Republic and find evidence that is consistent with the model predictions. By decreasing bribes, thier intervention reduces the average cost for firms and the price they charge to consumers. Since fewer firms substitute bribes for taxes, tax revenues increase.
The study highlights the role of firm heterogeneity and market structure in shaping the relationship between firms and tax inspectors, and provides clear evidence of pass-through of bribes to consumers.
This research is part of the Private Enterprise Development in Low Income Countries (PEDL) Programme.
Amodio, F., Choi, J., De Giorgi, G. and Rahman, A. (2018), Bribes Vs. Taxes: Market Structure and Incentives, PEDL