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The Economics of Repeated Extortion

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Author Info
Jay Pil Choi () (Michigan State University and CESifo)
Marcel Thum () (Dresden University of Technology, ifo Dresden, and CESifo)

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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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Publisher 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 listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. Telser, L G, 1979. "A Theory of Monopoly of Complementary Goods," Journal of Business, University of Chicago Press, vol. 52(2), pages 211-30, April. [Downloadable!] (restricted)
  3. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December. [Downloadable!]
  4. Kai A.Konrad & Stergios Skaperdas, 1997. "Backing up Words with Deeds: Information and punishment in organized crime," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 24, pages 51-63. [Downloadable!]
  5. Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer. [Downloadable!] (restricted)
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  8. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  9. Bond, Eric W. & Samuelson, Larry, 1989. "Bargaining with commitment, choice of techniques, and direct foreign investment," Journal of International Economics, Elsevier, vol. 26(1-2), pages 77-97, February. [Downloadable!] (restricted)
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  11. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
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  12. 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.
  13. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Blackwell Publishing, vol. 52(2), pages 173-91, April. [Downloadable!] (restricted)
  14. North, Douglass C, 1991. "Institutions," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 97-112, Winter. [Downloadable!] (restricted)
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    Other versions:
    • Andrei Shleifer & Robert W. Vishny, 1993. "Corruption," NBER Working Papers 4372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Harstad, Bård & Svensson, Jakob, 2006. "Bribes, Lobbying and Development," CEPR Discussion Papers 5759, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Johnson, Simon & McMillan, John & Woodruff, Christopher, 1999. "Property Rights, Finance, and Entrepreneurship," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Jennifer Hunt & Sonia Laszlo, 2005. "Bribery: Who Pays, Who Refuses, What Are the Payoffs?," NBER Working Papers 11635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Jay Pil Choi & Marcel Thum, 2007. "The Economics of Politically Connected Firms," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Sinn, Hans-Werner, 1999. "Inflation and Welfare: Comment on Robert Lucas," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. John Bennett & Saul Estrin, 2006. "Corruption and Bureaucratic Structure in a Developing Economy," Economics and Finance Discussion Papers 06-07, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
    Other versions:
  7. Jay Pil Choi & Marcel Thum, 2000. "The Dynamics of Corruption with the Ratchet Effect," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Osipian, Ararat, 2008. "The World is Flat: Modeling Educators’ Misconduct with Cellular Automata," MPRA Paper 7592, University Library of Munich, Germany. [Downloadable!]
  9. Svensson, Jakob, 2000. "Who must pay bribes and how much? Evidence from a cross-section of firms," Policy Research Working Paper Series 2486, The World Bank. [Downloadable!]
  10. Caruso, Raul, 2008. "Spesa Pubblica E Criminalità Organizzata In Italia Evidenza Empirica Su Dati Panel Nel Periodo 1997-2003," MPRA Paper 6861, University Library of Munich, Germany. [Downloadable!]
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This page was last updated on 2009-11-13.

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