Bribe-Switching

The US Foreign Corrupt Practices Act (FCPA) prohibits the payment of bribes to foreign public officials. We uncover an unintended consequence – the shadow economies of the countries of these officials increase after FCPA enforcement. Our hypothesis is that if the FCPA successfully deters corruption in legal markets, corrupt officials can switch to taking bribes from illegal markets. In equilibrium, they enforce less against illegal producers, thereby increasing the size of illegal markets. We find that one case of FCPA enforcement alone increases the shadow economy by as much as 0.27 percentage points (pp), tree loss - an indicator of illegal logging, by 0.027 pp, and trade misinvoicing by 0.5 pp