Extortion is a severe obstacle to doing business in many countries, varies both in its frequency and magnitude across establishments. This paper presents a model of extortion to account for these features and assess its quantitative effects. In the model, entrepreneur capital is subject to extortion which affects both the extensive and intensive margins of entrepreneurship. Despite common property rights, extortion rates arise endogenously and are hump-shaped in entrepreneur ability. To discipline the quantitative analysis, the model is calibrated to match establishment-level evidence related to extortion in Poland and yields a number of implications broadly consistent with establishment-level facts in developing economies. For measures of property rights within a plausible range, output losses can be upwards of 10 percent.

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We thank audiences at several conferences and institutions for comments and suggestions. All remaining errors are our own. Restuccia gratefully acknowledges the support from the Social Sciences and Humanities Research Council of Canada and the Canada Research Chairs program. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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