The economics of repeated extortion

We provide a simple model of repeated extortion. In particular, we ask whether corrupt government officials' opportunism to demand more once entrepreneurs have made sunk investments entails further distortion in resource allocations. If the choice of technology is left to the entrepreneurs, the dynamic path of demand schedules will induce entrepreneurs to pursue a "fly-by-night" strategy by adopting a technology with an inefficiently low sunk cost component. The unique equilibrium is characterized by a mixed strategy of the government official in future demand. Our model thus explains why arbitrariness is such a central feature of extortion. We also investigate implications of the stability of corrupt regimes for dynamic extortion and discuss alternative applications for our framework.