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Optimal Extortion and Political Risk Insurance

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  • Frédéric Koessler

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Ariane Lambert-Mogiliansky

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

We study the problem faced by firms that invest in a foreign country characterized by weak governance. Our focus is on extortion relying on the threat of expropriation and bureaucratic harassment. The bureaucrat's power is characterized by looking at a general extortion mechanism adapted from Myerson's (1981) optimal auction theory. This characterization is used to study the determinants of the quality of governance and whether and how political risk insurance of foreign direct investments improve upon it. We find that it does not always improve upon all governance indicators. It always decreases the bureaucrat's total revenue from corruption, but it may also increase the risk of expropriation and the extortion bribes paid by some firms.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00672963.

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Date of creation: Feb 2012
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Handle: RePEc:hal:psewpa:halshs-00672963

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Related research

Keywords: Auctions ; Corruption ; Expropriation ; Extortion ; Governance ; Harassment ; Mechanism Design ; Political Constraints ; Political Risk Insurance;

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References

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  1. Lambert-Mogiliansky, Ariane & Majumdar, Mukul & Radner, Roy, 2008. "Strategic Analysis of Petty Corruption with an Intermediary," Working Papers, Cornell University, Center for Analytic Economics 08-11, Cornell University, Center for Analytic Economics.
  2. Roberto Burguet & Yeon-Koo Che, 2004. "Competitive Procurement with Corruption," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 50-68, Spring.
  3. O. Compte & A. Lambert-Mogiliansky & T. Verdier, 2005. "Corruption and Competition in Procurement Auctions," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 1-15, Spring.
  4. Frédéric Koessler & Ariane Lambert-Mogiliansky, 2010. "Committing to transparency to resist corruption," PSE Working Papers, HAL halshs-00564890, HAL.
  5. Konrad, Kai A. & Skaperdas, Stergios, 1997. "Credible threats in extortion," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 33(1), pages 23-39, May.
  6. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  7. Figueroa, Nicolás & Skreta, Vasiliki, 2009. "The role of optimal threats in auction design," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(2), pages 884-897, March.
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