Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/48150 
Year of Publication: 
2003
Series/Report no.: 
Dresden Discussion Paper Series in Economics No. 13/03
Publisher: 
Technische Universität Dresden, Fakultät Wirtschaftswissenschaften, Dresden
Abstract: 
This paper provides a simple model of repeated extortion. In particular, we ask whether corrupt government officials' ex post opportunism to demand more once entrepreneurs have made sunk investments entails further distortion in resource allocations. We show that the inability of government officials to commit to future demands does not distort entry decisions any further if technology is not a choice variable for the entrepreneurs. The government official can properly discount the initial demand in order to induce the appropriate amount of entry. If, however, the choice of technology is left to the entrepreneurs, the dynamic path of demand schedules will induce entrepreneurs to pursue a fly-by-night strategy by adopting a technology with an inefficiently low sunk cost component. In this case, we show that the unique equilibrium is characterized by a mixed strategy of the government official in future demand. Our model thus explains why arbitrariness is such a central feature of extortion. We also investigate implications of the stability of the corrupt regime for dynamic extortion and discuss how our framework can be applied to other investment contexts involving the risk of expropriation.
Subjects: 
corruption
repeated extortion
ex post opportunism
dynamic consistency
dynamic cream skimming
JEL: 
D9
H2
K4
L1
Document Type: 
Working Paper

Files in This Item:
File
Size
627.79 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.