Abstract
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 corrupt officials may be switching to taking bribes from 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. Our results suggest the need to harmonize anti-corruption policies across all sectors—legal and illegal.
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