Extortion and political-risk insurance

Frederic Koessler and Ariane Lambert-Mogiliansky

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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)
Date: 2014-12
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Citations: View citations in EconPapers (8)

Published in Journal of Public Economics, 2014, 120, pp.144-156. ⟨10.1016/j.jpubeco.2014.09.006⟩

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Journal Article: Extortion and political-risk insurance (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01109153

DOI: 10.1016/j.jpubeco.2014.09.006

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