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The Economics of Repeated Extortion

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  • Jay Pil Choi

    ()
    (Michigan State University and CESifo)

  • Marcel Thum

    ()
    (Dresden University of Technology, ifo Dresden, and CESifo)

Abstract

We provide a simple model of repeated extortion. In particular, we ask whether corrupt government officials' opportunism to demand more once entrepreneurs have made sunk investments entails further distortion in resource allocations. If the choice of technology is left to the entrepreneurs, the dynamic path of demand schedules will induce entrepreneurs to pursue a ``fly-by-night'' strategy by adopting a technology with an inefficiently low sunk cost component. The unique equilibrium is characterized by a mixed strategy of the government official in future demand. Our model thus explains why arbitrariness is such a central feature of extortion. We also investigate implications of the stability of corrupt regimes for dynamic extortion and discuss alternative applications for our framework.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 2 (Summer)
Pages: 203-223

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Handle: RePEc:rje:randje:v:35:y:2004:2:p:203-223

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References

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  12. Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 427-443, March.
  13. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
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Citations

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Cited by:
  1. Jay Pil Choi & Marcel Thum, 2007. "The Economics of Politically Connected Firms," CESifo Working Paper Series 2025, CESifo Group Munich.
  2. JOhn Bennett & Saul Estrin, 2006. "Corruption and Bureaucratic Structure in a Developing Economy," William Davidson Institute Working Papers Series 825, William Davidson Institute at the University of Michigan.
  3. Jennifer Hunt & Sonia Laszlo, 2005. "Bribery: Who Pays, Who Refuses, What Are The Payoffs?," William Davidson Institute Working Papers Series wp792, William Davidson Institute at the University of Michigan.
  4. Ahlin, Christian & Bose, Pinaki, 2007. "Bribery, inefficiency, and bureaucratic delay," Journal of Development Economics, Elsevier, vol. 84(1), pages 465-486, September.

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