Corruption is generally defined as the use of public office for private gains (Bardhan 1997). Jain (2001) provides an overview of the agency model of the origin and spread of corruption in an economy. The economy consists of three groups of actors: firms and households, government leaders, and appointed public officials. The firms and households are the principals who are utility/wealth maximizers. They employ two groups of agents: government leaders and public officials. The government leaders formulate the regulatory laws and processes in the country. The appointed public officials interpret, implement, and uphold the regulatory laws and processes. Acceptance of the position of a government leader or appointed public official indicates that the incumbent has agreed that the pay is sufficient reward for his/her effort. The principals' well-being is impacted by actions (or inactions) of their agents.
Firms and households competitively lobby government leaders to align regulations in their favor. They also seek to influence the interpretation and implementation of these regulations by the bureaucracy, judiciary, and law enforcement to get a competitive edge over rivals. Such rent seeking has an efficiency cost for the economy (Tullock 1993, Krueger 1974, Bhagwati 1982). However, as long as it is transparent and open (and thereby precludes secret payments to public officials), there is no corruption involved. Corruption occurs when the agents' response to lobbying depends on secret private payments received. The literature labels it grand or political corruption when secret payments involve high-level government officials; legislative corruption when it involves elected representatives; and petty, administrative, bureaucratic, or judicial corruption when administrative or judicial officials are involved. Agency problems can only be resolved by monitoring, which is costly. Complete elimination of corruption, therefore, can be very costly. Indeed, there is scant historical or contemporary evidence of a country where the economy is completely free of corruption.
There is a view that although morally repugnant, corruption may play a useful role. For example, Leff(1964), Huntington (1968), and Leys (1965) argue that in countries burdened with cumbersome economic controls, selective tolerance of corruption is beneficial. (1) In such countries, corruption may "grease the wheels" of the economy so that it is "market expanding," according to Osterfeld (1992: 209). Rose-Ackerman (1997) questions that view and doubts that it is possible to contain corruption at a level where it is "efficient." Meanwhile, Kurer (1993) holds that corrupt officials have an incentive to create more opportunities for bribes. Finally, Murphy, Shleifer, and Vishny (1991) and Pecorino (1992) present the theoretical argument that corruption restricts the growth of an economy. Their view is supported by the empirical evidence in Mauro (1995), Mo (2001), Pelligrini and Gerlagh (2004), Meon and Sekkat (2005), and Swaleheen (2011).
The degree to which public officials in a country have the opportunity to resort to corruption depends on historical and homegrown factors--for example, the colonial past, level of economic development, electoral system, breadth and depth of regulations, decentralization, female participation, trade openness, inflation, and freedom of the press (Treisman 2000, Goel and Nelson 1998, Brunetti and Weder 2003, Swamy et al. 2001), as well as factors that originate in other countries (Lambsdorff 1998, Getz 2006, Cuervo-Cazurra 2008). National anticorruption policies typically aim at regulatory and administrative reforms with varying degrees of success.
The focus of this article is on factors that originate in other countries and, therefore, are beyond the scope of national policies. Until 1977, the encouragements to public officials to act corruptly that came from foreign sources were largely ignored, and the bribing of foreign officials did not attract any sanctions. The Foreign Corrupt Practices Act of 1977 (FCPA) was the first instance of a home country attempting to put legal limits on business practices employed by its residents abroad. This unilateral step expanded into a multilateral effort criminalizing the bribing of foreign officials by multinational enterprises (MNEs) from countries in the Americas in 1997 and Europe in 1999. However, perceived corruption and the use of bribes around the world was not significantly reduced (Getz 2006). This situation led to suggestions that a uniform sanction against the use of bribes for all MNEs, from all countries doing business anywhere in the world, is needed to prevent some MNEs from gaining by using bribes at the expense of others who do not (Cuervo-Cazurra 2008). In 2006, a full global sanction against the bribing of foreign officials by MNEs was agreed upon. Table 1 presents a chronology of the expansion of the anti-bribery...