DP6332 | The Simple Economics of Extortion: Evidence from Trucking in Aceh

Publication Date

08/06/2007

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Abstract

This paper tests whether the behaviour of corrupt officials is consistent with standard industrial organization theory. We designed a study in which surveyors accompanied truck drivers on 304 trips along their regular routes in two Indonesian provinces, during which we directly observed over 6,000 illegal payments to traffic police, military officers, and attendants at weigh stations. Using plausibly exogenous changes in the number of police and military checkpoints, we show that market structure affects the level of illegal payments, finding evidence consistent with double-marginalization and hold-up along a chain of vertical monopolies. Furthermore, we document that the illegal nature of these payments does not prevent corrupt officials from extracting additional revenue using complex pricing schemes, including third-degree price discrimination and a menu of two-part tariffs. Our findings illustrate the importance of considering the market structure for bribes when designing anti-corruption policy.