Bribery vs. extortion

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? Will a supervisor who can engage in bribery and extortion still be useful in providing incentives? We highlight the role of teamwork in forging information and present a model where supervision is valuable. We show that 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. Bribery, however, helps somewhat in providing incentive because it occurs when the agent is seen as violating the rules. The bribery payment acts as a penalty for “bad behavior”. We find that extortion is a more serious issue when incentives are primarily based on soft information, when the agent has greater bargaining power while negotiating an illegal payment, or when the agent has weaker outside opportunities. Our analysis provides lessons to fight corruption and explanations why developed countries may have an advantage in dealing with the threat of extortion.