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Public Protection Or Private Extortion?

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  • ETHAN BUENO DE MESQUITA
  • CATHERINE HAFER
Abstract
We analyze the strategic interaction between a firm, an extortionary mafia, and a potentially corrupt government. The model identifies several results. First, government spending is not monotonic in revenues. Second, although the firm wants the government to challenge the mafia (it uses the threat of electoral sanctions to induce the government to do so), in equilibrium, the firm does not directly appeal to the government for protection even though it is extorted. The more likely the government is to uncover mafia extortion independent of an appeal from the firm, the more effective the firm's threat of electoral sanction is at motivating the government to invest in law enforcement. This is because the electoral threat to punish failure on the government's part is only a compelling reason to invest in law enforcement when the government actually expects to confront the mafia. This same logic also implies that the relationship between mafia strength and government corruption is somewhat counterintuitive. When the mafia is strong in equilibrium (i.e. pervasive and extorting large fees), the government is not very corrupt. When the mafia is weak, the government is highly corrupt. Finally, an extension shows that if the mafia and government can collude, then the harsher the threatened sanctions against the mafia, the less likely the government is to challenge the mafia because the mafia is more willing to bribe the government.

Suggested Citation

  • Ethan Bueno De Mesquita & Catherine Hafer, 2008. "Public Protection Or Private Extortion?," Economics and Politics, Wiley Blackwell, vol. 20(1), pages 1-32, March.
    • Handle: RePEc:bla:ecopol:v:20:y:2008:i:1:p:1-32
    DOI: 10.1111/j.1468-0343.2007.00314.x
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    References listed on IDEAS

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    Cited by:

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    2. Soeren C. Schwuchow, 2023. "Organized crime as a link between inequality and corruption," European Journal of Law and Economics, Springer, vol. 55(3), pages 469-509, June.
    3. Byungwon Woo & Daniel Verdier, 2020. "A unifying theory of positive and negative incentives in international relations: sanctions, rewards, regime types, and compliance," Economics of Governance, Springer, vol. 21(3), pages 215-236, September.

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