South-Western College Publishing - Economics  
Reduce Corruption by Coordinating Extortionists
Topic Monopoly
Key Words Bribery, extortion, monopoly, elasticity.
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Reference ID: A162945561

News Story Two economists have discovered that extortionists in developing countries behave like economists. Is that a good thing?

The researchers traveled with truck drivers over two main roads in Indonesia and systematically recorded the bribes that took place over the 400-mile long trip. What they discovered is that those seeking bribes act as their own little monopolies at the checkpoints.

The researchers went on 304 trips and recorded over 6,000 bribes. At the twenty-seven different checkpoints along the route, the drivers paid an average total of US$23. What makes this study interesting is that at the beginning of the route, little discussion took place, and the truck drivers simply handed over cigarettes or a few cents to the guards. But as the drivers got closer and closer to the destination, the guards began demanding more money, money that the drivers did not feel comfortable complaining about, fearing the loss of their cargo the closer they were to their destination.

After civil unrest in the region fell, the number of checkpoints fell by half. Seeing this, the researchers felt that they had a wonderful opportunity to look at changes in bribery that took place. As the number of checkpoints fell, the total amount of bribes paid out fell, but only by about 36%. Fewer bribes were taking place, but the amounts given at each were increasing.

This offers evidence that the checkpoint guards were acting as their own monopolies, independent of the actions of others. They sought to capture their own share of the increased surplus of funds of the truck drivers, and in doing so, maximized their own revenue. However, they may have been better off coordinating bribes - colluding as a single entity. Rather than decentralizing the bribery, and increasing the total number of payment, coordination would at least reduce the number of bribes, and potentially reduce the amount paid by the truck drivers. That's an interesting way of eliminating a problem.

Questions
Discussion Questions:
1. Why might it be in the best interests of the truck drivers for the checkpoint guards to coordinate their own efforts at taking bribes?
2. Draw a graph of a monopoly that maximizes its revenue rather than maximizes its profit. Be sure to indicate what you are assuming about marginal cost in this graph.
3. After the number of checkpoints fell, do you think that some checkpoints raised their bribes by more than others? Why or why not?
Multiple Choice/True False Questions:
1. If these individuals are maximizing revenue in setting prices for bribes, then they would also be maximizing profit if marginal cost was

  1. positive.
  2. zero.
  3. Equal to marginal revenue.
  4. B and C
2. How is the elasticity of bribery changing as the distance to the delivery location falls?
  1. Elasticity is falling.
  2. Elasticity is rising.
  3. Elasticity is not changing.
  4. Elasticity is positive.
3. The coordination of decision-making in competitive markets was made illegal in the US under which act?

  1. Sherman Antitrust Act
  2. Glass-Steagal Act
  3. Smoot-Hawley Act
  4. Sarbanes-Oxley Act
Source "Rules of the Road," The Economist. May 3, 2007.
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