Abstract

As stories of bribe-giving, like corporate contributions to campaign funds and Enron scandals, continue to rock the corporate world, it is imperative that implication of such activities on long-term market outcomes is evaluated. Can bribe-giving have long-term and far-reaching consequences for an oligopolistic market? In this paper we attempt to provide an answer to this question by developing a simple duopoly model that characterizes a perfect Nash equilibrium of bribe-giving. This allows us to establish some perplexing comparative static properties of the market equilibrium. The primary intuition behind our results is that bribe-giving can have serious impacts on the long-run equilibrium of an oligopoly through their effects on the incentives of and constraints on individual firms to form alliances, or partnerships. Bribe-giving, through its effects on individual costs, can trigger a series of endogenously-driven changes in an industry. One of the key changes is the endogenous formation of business alliances (also known as endogenous mergers), which is driven by changes in costs as a direct consequence of bribes. We construct a model of endogenous mergers, to our understanding for the first time, to shed some light on the incentives of firms to endogenously merge in the context of bribe-giving. We show that this can seriously influence the welfare of market participants.

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