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Pre-emptive Corruption, Hold-up and Repeated Interactions



This paper analyses repeated interactions between a firm and an inspector who monitors regulatory compliance. The firm may offer a bribe to pre-empt the inspection. Corruption is unfeasible in the one-shot game because of inspector hold-up. In an infinitely repeated game, we characterize the set of bribes that can be sustained as equilibrium paths using the trigger strategy. In this model, the most likely bribe-givers are not the firms that benefit the most from the illegal behaviour. Furthermore, strengthening anti-corruption policies has ambiguous welfare effects because it improves compliance only among a subset of firms, and increases monitoring effort.