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Bribery vs. Extortion: Allowing the Lesser of two Evils

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Author Info
Fahad Khalil ()
Jacques Lawarrée ()
Sungho Yun ()

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Abstract

Rewards to prevent supervisors from accepting bribes create incentives for extortion. This raises the question whether a supervisor who can engage in bribery and extortion can still be useful in providing incentives. By highlighting the role of team work in forging information, we present a notion of soft information that makes supervision valuable. We show that a fear of inducing extortion may make it optimal to allow bribery, but extortion is never tolerated. Even though both increase incentive cost, extortion penalizes the agent after “good behavior”, while bribery penalizes the agent after “bad behavior”. Since bribery occurs when a violation is detected, the bribe is a penalty for “bad behavior”, and helps somewhat in providing incentive. We find that extortion is a more serious issue when incentives are primarily based on soft information, when the agent has a greater bargaining power while negotiating an illegal payment, or when the agent has weaker outside opportunities. Our analysis provides explanations why extortion may be less of a problem in developed countries.

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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. 1993.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1993

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Related research
Keywords: monitoring; corruption; collusion; bribery; extortion; framing;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

References listed on IDEAS
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  1. Strausz, Roland, 1997. " Collusion and Renegotiation in a Principal-Supervisor-Agent Relationship," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(4), pages 497-518, December. [Downloadable!] (restricted)
    Other versions:
  2. A. Mitchell Polinsky & Steven Shavell, 1999. "Corruption and Optimal Law Enforcement," NBER Working Papers 6945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  4. Mookherjee, Dilip & Png, I P L, 1995. "Corruptible Law Enforcers: How Should They Be Compensated?," Economic Journal, Royal Economic Society, vol. 105(428), pages 145-59, January. [Downloadable!] (restricted)
  5. Johnson, Ronald N & Libecap, Gary D, 1989. "Bureaucratic Rules, Supervisor Behavior, and the Effect on Salaries in the Federal Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 53-82, Spring.
  6. Emilson C. D. Silva & Charles M. Kahn & Xie Zhu, 2007. "Crime and Punishment and Corruption: Who Needs "Untouchables?"," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 69-87, 02. [Downloadable!] (restricted)
  7. Baliga, Sandeep, 1999. "Monitoring and Collusion with "Soft" Information," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 434-40, July.
  8. Olsen, T.E. & Torsvik, G., 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," Norway; Department of Economics, University of Bergen 179, Department of Economics, University of Bergen.
  9. Olsen, Trond E & Torsvik, Gaute, 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 413-38, May.
  10. Yeon-Koo Che, 1995. "Revolving Doors and the Optimal Tolerance for Agency Collusion," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 378-397, Autumn. [Downloadable!] (restricted)
  11. Caillaud, Bernard & Tirole, Jean, 2007. "Consensus Building: How to Persuade a Group," IDEI Working Papers 435, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  12. Juan D. Carrillo, 2000. "Graft, Bribes, and the Practice of Corruption," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 9(2), pages 257-288, 06. [Downloadable!] (restricted)
  13. Ariane Lambert-Mogiliansky, 1998. "On optimality of illegal collusion in contracts," Review of Economic Design, Springer, vol. 3(4), pages 303-328. [Downloadable!] (restricted)
  14. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27. [Downloadable!] (restricted)
    Other versions:
  15. Juan D. Carrillo, 2000. "Graft, Bribes, and the Practice of Corruption," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 9(3), pages 257-286, 06. [Downloadable!] (restricted)
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