Collusion and Extortion: The Twin Faces of Corruption (joint with Dilip Mookherjee)

Wednesday 28 November 2012, 4.15PM to 5.45pm

Speaker(s): Ajit Mishra, University of Bath

Abstract

Corruption has two faces: collusion and extortion. The former refers to under-reporting of offenses by inspectors in exchange for bribes. The latter refers to bribes extracted against the threat of over-reporting. Both distort penalties that offenders expect to pay, relative to what they are supposed to pay, and can seriously reduce incentives to commit offenses. Existing theoretical literature on corruption control has recognized the tension between these two forms, while taking the structure of legally mandated fines for offenses as given. It has argued that extortion poses serious problems for high-powered incentive schemes for inspectors designed to combat problems of collusion. We argue that corruption control policies should be enlarged to include choice of fines, as these can help greatly in controlling both problems. We demonstrate a variety of contexts where problems of dilution of deterrence incentives owing to both collusion and extortion can be resolved by adjusting mandated fines, even though judicial systems may be weak and ineffective, and civil service norms may restrict use of high-powered bonus schemes for inspectors.

Location: Economics Staff Room (A/EC/202)