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Bribery vs. extortion: allowing the lesser of two evils

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Rewards to prevent supervisors from accepting bribes create incentives for extortion. This raises the question whether a supervisor who can engage in bribery and extortion can still be useful in providing incentives. By highlighting the role of team work in forging information, we present a notion of soft information that makes supervision valuable. We show that a fear of inducing extortion may make it optimal to allow bribery, but extortion is never tolerated. Even though both increase incentive cost, extortion penalizes the agent after good behavior , while bribery penalizes the agent after bad behavior . Since bribery occurs when a violation is detected, the bribe is a penalty for bad behavior , and helps somewhat in providing incentive. We find that extortion is a more serious issue when incentives are primarily based on soft information, when the agent has a greater bargaining power while negotiating an illegal payment, or when the agent has weaker outside opportunities. Our analysis provides explanations why extortion may be less of a problem in developed countries.

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Fahad Khalil, Jacques Lawarrée, Sungho Yun

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Adapt according to the presented license agreement and reference the original author.