Journal
JOURNAL OF PUBLIC ECONOMICS
Volume 120, Issue -, Pages 144-156Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jpubeco.2014.09.006
Keywords
Auctions; Corruption; Expropriation; Extortion; Governance; Harassment; Mechanism design; Political-risk insurance
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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. (C) 2014 Elsevier B.V. All rights reserved.
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