Property Rights, Extortion and the Misallocation of Talent

Extortion is a severe obstacle to doing business in many countries, varies both in its frequency and magnitude across establishments. This paper presents a model of extortion to account for these features and assess its quantitative effects. In the model, entrepreneur capital is subject to extortion which affects both the extensive and intensive margins of entrepreneurship. Despite common property rights, extortion rates arise endogenously and are hump-shaped in entrepreneur ability. To discipline the quantitative analysis, the model is calibrated to match establishment-level evidence related to extortion in Poland and yields a number of implications broadly consistent with establishment-level facts in developing economies. For measures of property rights within a plausible range, output losses can be upwards of 10 percent.