The industrial organization of extortion

Extortion is illegal, but still tolerated in some parts of the world. Understanding it well is key to eradicate it. Benjamin Olken and Patrick Barron have recently published a fascinating article that describes extortion at weigh stations and roadside check points in Aceh, Indonesia. They managed to record about 6000 transactions at these location by having observers ride along on trucks on the two routes that lead into Aced from the Province of Sumatra. Of particular interest is that the "market" there differs by province, because the density of check points was higher in Aceh (there was a civil war) than in Northern Sumatra, and it has significantly dropped in Aceh after a truce led to major troop withdrawals.

The experiment is fascinating, and so are the data analysis. Indeed, it looks like extortions (to avoid various fines, mostly on truck weight) follow extremely well what economic theory would tell you. To take a few examples: "fees", or should we call them tolls, are implicitly negotiated and are higher for heavier, newer trucks with more valuable cargo at stops with more officers with visible arms. These tolls are also higher closer to the destination, a nice example of the hold-up problem. Also, with the reduction in the number of check points on the roads, the fees at each point have increased significantly. Thus market structure matters a lot. In particular, decentralization can lead to higher bribes, thus rooting out corruption at the top is not the solution.