Corruption and Social Capital: The Case of Vietnam

Abstract: Corruption between the principal (public official) and her agent (firm) is examined in a new setting, where the corrupt process is not only an economic game, but also a social one. When formal institutions fail, the provision of public goods and services is often embedded in social relations. The aim of this study is to determine if, and if so how, social capital affects firm's probability of paying informal fees and their bribe-premium. Social capital is in this study defined as membership in the Communist Party of Vietnam and the size of firm's political network. Using a firm-level panel data set of manufacturing SMEs in Vietnam and a law amendment, which generates an obligation to obtain an environmental standards certificate, a Difference-in-Difference estimation approach is used to study the relation of interest. I find that firms with large political networks have higher probability of engaging in corrupt activities, supporting the facilitative quality of social network on corruption. Firms with large political networks also have lower probability of paying informal fees after obtaining the certificate. This result is accompanied with a higher probability of bribing prior to the law amendment, thus, indicating reciprocity within the networks. This pattern is not found when social capital is defined as party-membership or for firms with small networks.