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Bribery vs. extortion: allowing the lesser of two evils

  • Fahad Khalil
  • Jacques Lawarree
  • 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 University of Washington, Department of Economics in its series Working Papers with number UWEC-2007-11-P.

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Date of creation: Jul 2009
Date of revision: Jul 2009
Publication status: Published in RAND Journal of Economics, Volume 41(1), 179–198, Spring 2010
Handle: RePEc:udb:wpaper:uwec-2007-11-p
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  1. A. Mitchell Polinsky & Steven Shavell, 1999. "Corruption and Optimal Law Enforcement," NBER Working Papers 6945, National Bureau of Economic Research, Inc.
  2. 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.
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  13. 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.
  14. 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.
  15. 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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