In my post last week, I discussed a recent working paper (by Cheung, Rao, and Stouraitis) that attempted to measure the economic returns firms reap from foreign bribery — and which reached the depressing conclusion that, much as we would like to believe otherwise, bribery still “pays.” In doing a bit more research along these lines, I came across another terrific working paper — by Jonathan Karpoff, D. Scott Lee, and Gerald Martin — that investigates a similar question, using a somewhat different (though complementary) method, and reaches a similar conclusion: in the authors’ words, “firms engage in bribery because it pays to bribe, on average.”
Let’s suppose — plausibly, in my view — that these papers are correct in their conclusions that, given the expected costs of foreign bribery (probability of detection times expected magnitude of direct and indirect sanctions), many firms will find it in their rational self-interest to bribe. If one believes (as I do) that foreign bribery is a social cost that we should try to deter (if we can do so at reasonable cost), then this implies that we should increase the expected cost to firms of paying bribes abroad — either by increasing the probability of detection, or the size of the penalty, or both.
One of the cool things about the Karpoff, Lee, and Martin paper is that it attempts to calculate just how much higher the penalties would have to be in order to deter foreign bribery, if the probability of detection remains constant. Their sobering answer is that the average penalties would have to by about 9.2 times larger. So, despite all the hyperbole about the enormous size of FCPA penalties (with the US government bragging about the large penalties, and the business community and defense bar griping about same), this recent research suggests that the penalties are almost an order of magnitude too small, if we really want to deter foreign bribery. (The authors also calculate how much the probability of detection would have to increase to deter foreign bribery, if the penalties remain the same. Their conclusion is that it would have to increase from the current estimated level of 6.4% to about 58.5% — clearly unrealistic.)
What to make of this? A few preliminary thoughts: