“Bribery vs. Extortion: Allowing the Lesser of Two Evils” by Fahad KHALIL
Authors:
Sungho YUN
Hanyang UniversityFahad KHALIL
University of WashingtonJacques LAWARRÉE
University of Washington
Both bribery and extortion weaken the power of incentives, but there is a tradeoff in fighting the two since rewards to prevent supervisors from accepting bribes create incentives for extortion. Which is the worse evil? Can a supervisor who can engage in bribery and extortion 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. 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 developed countries may have an advantage in dealing with the threat of extortion.
