Extortion and political-risk insurance

Frederic Koessler and Ariane Lambert-Mogiliansky

Journal of Public Economics, 2014, vol. 120, issue C, 144-156

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.

Keywords: Auctions; Corruption; Expropriation; Extortion; Governance; Harassment; Mechanism design; Political-risk insurance (search for similar items in EconPapers)
JEL-codes: D44 D73 D82 F21 G22 H23 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Extortion and political-risk insurance (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:120:y:2014:i:c:p:144-156

DOI: 10.1016/j.jpubeco.2014.09.006

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