Predictable Corruption and Investment Strategy: Evidence from a Natural Experiment and Survey of Cambodian Entrepreneurs.

This paper utilizes a unique dataset of 500 firms in ten Cambodian provinces and a natural experiment to rigorously test one the most important propositions in political economy; that the predictability of a corruption is more important for firm investment decisions than the amount of bribes a firm must pay, provided the bribes are not prohibitively expensive. We find persuasive evidence that this hypothesis is correct. Firms exposed to a shock to their bribe schedules by a change in governor invest significantly less in subsequent periods, as they wait for new information about their chief executive. The result is particularly persuasive, because the amount of corruption (measured both by survey data and proxied by the amount of commercial sex workers) is significantly lower in provinces with new governors. Thus, predictability clearly trumps the amount of corruption in individual firms' investment decisions. The finding is robust to a battery of firm-level controls and province-level investment climate measures. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]