Extortion and political-risk insurance

Frederic Koessler and Ariane Lambert-Mogiliansky ()
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Ariane Lambert-Mogiliansky: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique

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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 (5)

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:pseptp:halshs-01109153

DOI: 10.1016/j.jpubeco.2014.09.006

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