Bribery versus extortion: allowing the lesser of two evils

Abstract

Both bribery and extortion weaken the power of incentives, but there is a trade-off in fighting the two because rewards to prevent supervisors from accepting bribes create incentives for extortion. Which is the worse evil? 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, whereas a bribe acts as a penalty for "bad behavior." Our analysis provides lessons to fight corruption and explanations why developed countries may have an advantage in dealing with extortion.