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Bribery vs. Extortion: Allowing the Lesser of two Evils

  • Fahad Khalil
  • Jacques Lawarrée
  • Sungho Yun

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1993.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1993
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  1. 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.
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  4. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 2003. "Collusion, Delegation and Supervision with Soft Information," IDEI Working Papers 167, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Caillaud, Bernard & Tirole, Jean, 2007. "Consensus Building: How to Persuade a Group," IDEI Working Papers 435, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. repec:dgr:kubcen:199548 is not listed on IDEAS
  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. Strausz, Roland, 1997. " Collusion and Renegotiation in a Principal-Supervisor-Agent Relationship," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 497-518, December.
  9. Faure-Grimaud Antoine & Laffont Jean-Jacques & Martimort David, 2003. "Risk Averse Supervisors and the Efficiency of Collusion," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-32, January.
  10. Juan D. Carrillo, 2000. "Graft, Bribes, and the Practice of Corruption," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(2), pages 257-288, 06.
  11. Polinsky, A. Mitchell & Shavell, Steven, 2001. "Corruption and optimal law enforcement," Journal of Public Economics, Elsevier, vol. 81(1), pages 1-24, July.
  12. Ariane Lambert-Mogiliansky, 1998. "On optimality of illegal collusion in contracts," Review of Economic Design, Springer, vol. 3(4), pages 303-328.
  13. Juan D. Carrillo, 2000. "Graft, Bribes, and the Practice of Corruption," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 257-286, 06.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
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