The main purpose of the paper is to develop a simple theoretical model of rent extraction with uncertainty. Corruption or rent-seeking behavior is focused on bribery and the market for local (district) government regulatory goods such as business license, fire safety inspection, compliance to environmental regulations, local tax appraisal, building permits, employment contract inspection etc. We abstract from other rent-seeking activities like lobbying governments for particular projects, lobbying for industrial protection, lobbying for exclusive monopoly rights and so on. In the model, government related can be customized to extract rent. A firm has to spend money and times to reduce burden. For this purpose a specific negotiation technology is constructed. The model predicts that a firm would engage in negotiation if the burden is sufficiently high, and if the marginal effectiveness of bribes exceeds the marginal cost of bribes in negotiation. The empirical implication of the theoretical model predicts that the outcomes of bribes are uncertain in Indonesia and could be traced back to the fragmentation of the bribe system.
Ari Kuncoro
