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Extortion and political-risk insurance

Author

Listed:
  • Frédéric Koessler

    (PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Ariane Lambert-Mogiliansky

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique)

Abstract

We consider the problem faced by firms operating in a foreign country characterized by weak governance. Our focus is on extortion based on the threat of expropriation and bureaucratic harassment. The bureaucrat's bargaining power is characterized by a general extortion mechanism adapted from the optimal auction theory in Myerson (1981). This characterization is used to analyze the determinants of the quality of governance and whether and how this is improved by political-risk insurance. This insurance reduces the bureaucrat's total revenue from corruption, but may also increase the risk of expropriation and extortion bribes. The analysis allows us to derive some policy recommendations with respect to public intervention in the political-risk insurance sector.

Suggested Citation

  • Frédéric Koessler & Ariane Lambert-Mogiliansky, 2014. "Extortion and political-risk insurance," Post-Print halshs-01109153, HAL.
    • Handle: RePEc:hal:journl:halshs-01109153
    DOI: 10.1016/j.jpubeco.2014.09.006
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    Cited by:

    1. Mireille Chiroleu-Assouline & Ariane Lambert-Mogiliansky, 2020. "Optimal Environmental Radical Activism," Working Papers 2020.07, FAERE - French Association of Environmental and Resource Economists.
    2. Chiroleu-Assouline, Mireille & Lambert-Mogiliansky, Ariane, 2023. "Radical activism and self-regulation: An optimal campaign mechanism," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    3. Akhtaruzzaman, M. & Berg, Nathan & Hajzler, Christopher, 2017. "Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?," European Journal of Political Economy, Elsevier, vol. 49(C), pages 84-107.
    4. Christopher Hajzler & Jonathan Rosborough, 2016. "Government Corruption and Foreign Direct Investment Under the Threat of Expropriation," Staff Working Papers 16-13, Bank of Canada.

    More about this item

    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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