Domestic Sanctions to Cross-border Acts: the Case of Foreign Bribery

Abstract: By treating the bribery of a foreign public official by a firm similar to that of a domestic public official, the 1997 OECD Anti-Bribery Convention seeked a solution to enforcement issues that commonly plague the observance of international law. However, the application of the convention has been troublesome. Each jurisdiction has an incentive to free-ride, not to damage the prospects of home firms to obtain valued contracts abroad. Moreover, institutional asymmetries of various types may result in differences in the effectiveness of enforcement across jurisdictions and, possibly, also across branches of the public sector. We provide a simple theory capturing country institutional heterogeneity and how it affects the individual incentives to offer a bribe, and on the part of the foreign public official, to accept it. We expand this model by including variables aimed at capturing informal institutional dimensions, such as culture and culture distance between pairs of countries. We test our model using a novel dataset of alleged and convicted cases of foreign bribery that approximates for actual bribe flows between countries. The heterogeneity of formal institutions does not seem to play a role in determining the level of detected corruption. On the other hand, elements of informal institutions, such as cultural distance between countries, are found to matter. Within this broad picture, results vary significantly in different branches of the public sector.