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The Economics of Repeated Extortion

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Author Info
Jay Pil Choi ()
Marcel Thum ()

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Abstract

This paper provides a simple model of repeated extortion. In particular, we ask whether corrupt government officials' ex post opportunism to demand more once entrepreneurs have made sunk investments entails further distortion in resource allocations. We show that the inability of government officials to commit to future demands does not distort entry decisions any further if technology is not a choice variable for the entrepreneurs. The government official can properly discount the initial demand in order to induce the appropriate amount of entry. If, however, 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 adpoting a technology with an inefficiently low sunk cost component. In this case, we show that the unique equilibrium is characterized by a mixed strategy of the government official in future demand. Our model thus explains why arbitrariness is such an inseparable feature of corruption. We also investigate implications of the stability of the corrupt regime for dynamic extortion and discuss how our framework can be applied to other investment contexts involving the risk of expropriation.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 172.

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Date of creation: 1998
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Handle: RePEc:ces:ceswps:_172

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Related research
Keywords: Corruption; repeated extortion; ex post opportunism; dynamic consistency; dynamic cream skimming;

Other versions of this item:

Find related papers by JEL classification:
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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!]
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  7. Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  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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  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)
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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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Cited by:
(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. Hunt, Jennifer & Laszlo, Sonia, 2005. "Bribery: Who Pays, Who Refuses, What are the Payoffs?," CEPR Discussion Papers 5251, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  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 Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  3. Harstad, Bård & Svensson, Jakob, 2006. "Bribes, Lobbying and Development," CEPR Discussion Papers 5759, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Osipian, Ararat, 2008. "The World is Flat: Modeling Educators’ Misconduct with Cellular Automata," MPRA Paper 7592, University Library of Munich, Germany. [Downloadable!]
  5. Johnson, Simon & McMillan, John & Woodruff, Christopher, 1999. "Property Rights, Finance, and Entrepreneurship," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Jay Pil Choi & Marcel Thum, 2007. "The Economics of Politically Connected Firms," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. 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!]
  8. 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!]
  9. 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:
  10. 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:
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