Both bribery and extortion weaken the power of incentives, but there is a trade-off in fighting the two because rewards to prevent supervisors from accepting bribes create incentives for extortion. Which is the worse evil? A fear of inducing extortion may make it optimal to tolerate bribery, but extortion is never allowed. Extortion discourages good behavior because the agent suffers from it even though he has done the right thing, whereas a bribe acts as a penalty for bad behavior. Our analysis provides lessons to fight corruption and explanations why developed countries may have an advantage in dealing with extortion. Copyright (c) 2010, RAND.

This paper presents a three-tier law enforcement model in which an inspector monitors a firm’s discharge of waste and reports it to a regulator. The inspector may engage in three forms of corruption – bribery, extortion and framing – with two types of costs: the cost of distorting information against the firm and the cost of side-transfer. In contrast with the earlier literature on corruption, we show that not only bribery but also extortion and framing may occur in equilibrium, even when all the forms of corruption could be deterred. We also find that higher costs of engaging in corruption may result in lower social welfare. Although these costs make engaging in corruption more difficult and hence more easily deter corruption, when corruption occurs in equilibrium, the costs cause wastage of scarce resources from society’s point of view. This analysis also provides an explanation of why corruption is more pervasive in less developed countries.

This paper considers an agency contracting with multiple tasks. The agent is privately informed on some tasks, but he must gather information on the other. We show that depending on the cost to gather information, task assignment is employed as an instrument to induce information gathering, or as an instrument to induce a truthful report.

We compare upfront and staged financing to see when and how one financing policy prevails over the other. In our model, there are two moral hazard problems that interact with each other. First, the entrepreneur may pursue his own private benefit out of the raised fund in the initial period. Second, the entrepreneur may shirk on project evaluation at the refinancing stage if the project is stage-financed. When the entrepreneur's effort for project evaluation is verifiable, the project may be stage-financed even if the cost of evaluating effort exceeds the value of information (over-evaluation). When such effort is unverifiable, the project may be financed upfront even if the value of information exceeds the cost of evaluating effort (under-evaluation).

Informed principal, Information gathering agent, D82, L23,