Bribe-Switching

The Foreign Corrupt Practices Act (FCPA) prohibits US firms from paying bribes to foreign public officials. We show that FCPA enforcement has no positive effect on the GDP per capita of the countries of these officials but, rather, increases their countries’ shadow economy. When public officials take bribes both from legal and illegal markets, corruption enforcement in legal markets induces them to make up for lost rents by taking more 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 0.25 percentage point (pp), homicide rates by 0.02 pp, and trade misinvoicing by 0.5 pp