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Extortion and political-risk insurance

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  • Koessler, Frédéric
  • Lambert-Mogiliansky, Ariane

Abstract

We consider the problem faced by firms operating in a foreign country characterized by weak governance. Our focus is on extortion based on the threat of expropriation and bureaucratic harassment. The bureaucrat's bargaining power is characterized by a general extortion mechanism adapted from the optimal auction theory in Myerson (1981). This characterization is used to analyze the determinants of the quality of governance and whether and how this is improved by political-risk insurance. This insurance reduces the bureaucrat's total revenue from corruption, but may also increase the risk of expropriation and extortion bribes. The analysis allows us to derive some policy recommendations with respect to public intervention in the political-risk insurance sector.

Suggested Citation

  • Koessler, Frédéric & Lambert-Mogiliansky, Ariane, 2014. "Extortion and political-risk insurance," Journal of Public Economics, Elsevier, vol. 120(C), pages 144-156.
    • Handle: RePEc:eee:pubeco:v:120:y:2014:i:c:p:144-156
    DOI: 10.1016/j.jpubeco.2014.09.006
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    1. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 81-108.
    2. Jay Pil Choi & Marcel Thum, 2004. "The Economics of Repeated Extortion," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 203-223, Summer.
    3. Lambert-Mogiliansky, Ariane & Majumdar, Mukul & Radner, Roy, 2007. "Strategic analysis of petty corruption: Entrepreneurs and bureaucrats," Journal of Development Economics, Elsevier, vol. 83(2), pages 351-367, July.
    4. Hindriks, Jean & Keen, Michael & Muthoo, Abhinay, 1999. "Corruption, extortion and evasion," Journal of Public Economics, Elsevier, vol. 74(3), pages 395-430, December.
    5. Figueroa, Nicolás & Skreta, Vasiliki, 2009. "The role of optimal threats in auction design," Journal of Economic Theory, Elsevier, vol. 144(2), pages 884-897, March.
    6. Ariane Lambert-Mogiliansky & Mukul Majumdar & Roy Radner, 2009. "Strategic analysis of petty corruption with an intermediary," Review of Economic Design, Springer;Society for Economic Design, vol. 13(1), pages 45-57, April.
    7. Kobrin, Stephen J., 1980. "Foreign enterprise and forced divestment in LDCs," International Organization, Cambridge University Press, vol. 34(1), pages 65-88, January.
    8. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    9. Konrad, Kai A. & Skaperdas, Stergios, 1997. "Credible threats in extortion," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 23-39, May.
    10. Ariane Lambert-Mogiliansky & Mukul Majumdar & Roy Radner, 2007. "Strategic Analysis of Petty Corruption: Bureaucrats and Entrepreneurs," PSE-Ecole d'économie de Paris (Postprint) halshs-00754220, HAL.
    11. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 681-712.
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    Cited by:

    1. Mireille Chiroleu-Assouline & Ariane Lambert-Mogiliansky, 2020. "Optimal Environmental Radical Activism," Working Papers 2020.07, FAERE - French Association of Environmental and Resource Economists.
    2. Akhtaruzzaman, M. & Berg, Nathan & Hajzler, Christopher, 2017. "Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?," European Journal of Political Economy, Elsevier, vol. 49(C), pages 84-107.
    3. Chiroleu-Assouline, Mireille & Lambert-Mogiliansky, Ariane, 2023. "Radical activism and self-regulation: An optimal campaign mechanism," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    4. Christopher Hajzler & Jonathan Rosborough, 2016. "Government Corruption and Foreign Direct Investment Under the Threat of Expropriation," Staff Working Papers 16-13, Bank of Canada.

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    More about this item

    Keywords

    Auctions; Corruption; Expropriation; Extortion; Governance; Harassment; Mechanism design; Political-risk insurance;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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