Foreign Corrupt Practices Act (FCPA) and market quality in emerging economies

Abstract In many emerging economies with antiquated laws, bribes paid to government officials reduce economic impediments and serve as a device to improve market competition, thereby contributing to the modernization of an economy. In this context, this paper uses a simple two‐stage game theoretic model to investigate the effects of the US Foreign Corrupt Practices Act (FCPA) on such economies. We demonstrate, among others, that while an increase in fines under FCPA reduces overall corruption, it leads to a deterioration in the market quality in an emerging economy. In the presence of FCPA, an increase in the US firm's technological advantage unambiguously leads to a decrease in the market quality in an emerging economy.