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Public Protection Or Private Extortion?

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  • ETHAN BUENO DE MESQUITA
  • CATHERINE HAFER
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    Abstract

    We analyze the strategic interaction between a firm, an extortionary mafia, and a potentially corrupt government. The model identifies several results. First, government spending is not monotonic in revenues. Second, although the firm wants the government to challenge the mafia (it uses the threat of electoral sanctions to induce the government to do so), in equilibrium, the firm does not directly appeal to the government for protection even though it is extorted. The more likely the government is to uncover mafia extortion independent of an appeal from the firm, the more effective the firm's threat of electoral sanction is at motivating the government to invest in law enforcement. This is because the electoral threat to punish failure on the government's part is only a compelling reason to invest in law enforcement when the government actually expects to confront the mafia. This same logic also implies that the relationship between mafia strength and government corruption is somewhat counterintuitive. When the mafia is strong in equilibrium (i.e. pervasive and extorting large fees), the government is not very corrupt. When the mafia is weak, the government is highly corrupt. Finally, an extension shows that if the mafia and government can collude, then the harsher the threatened sanctions against the mafia, the less likely the government is to challenge the mafia because the mafia is more willing to bribe the government. Copyright 2007 Blackwell Publishing Ltd..

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Economics & Politics.

    Volume (Year): 20 (2008)
    Issue (Month): 1 (03)
    Pages: 1-32

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    Handle: RePEc:bla:ecopol:v:20:y:2008:i:1:p:1-32

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0954-1985

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    References

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    1. Kugler, Maurice & Verdier, Thierry & Zenou, Yves, 2005. "Organized crime, corruption and punishment," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1639-1663, September.
    2. Bowles, Roger & Garoupa, Nuno, 1997. "Casual police corruption and the economics of crime," International Review of Law and Economics, Elsevier, vol. 17(1), pages 75-87, March.
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    8. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
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    12. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
    13. Catherine Hafer, 2006. "On the Origins of Property Rights: Conflict and Productionin the State of Nature," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 119-143.
    14. Varese, Federico, 2001. "The Russian Mafia: Private Protection in a New Market Economy," OUP Catalogue, Oxford University Press, number 9780198297369.
    15. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
    16. Hay, Jonathan R & Shleifer, Andrei, 1998. "Private Enforcement of Public Laws: A Theory of Legal Reform," American Economic Review, American Economic Association, vol. 88(2), pages 398-403, May.
    17. Jellal, Mohamed & Garoupa, Nuno, 2007. "Information corruption and optimal law enforcement," MPRA Paper 38413, University Library of Munich, Germany.
    18. Braguinsky, Serguey, 1999. "Enforcement of Property Rights during the Russian Transition: Problems and Some Approaches to a New Liberal Solution," The Journal of Legal Studies, University of Chicago Press, vol. 28(2), pages 515-44, June.
    19. Scott Gehlbach, 2007. "Revenue Traps," Economics and Politics, Wiley Blackwell, vol. 19(1), pages 73-96, 03.
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