A principal employs an agent to collect taxes.  The principal cannot observe how hard the agent is working.  What is the best way to set up incentives?  Suppose the principal asks for a share of the tax revenue.  This acts as a tax on the agent’s effort so he will under-invest.  The agent also has the incentive to hide tax revenue.  Not the best incentive scheme.  Perhaps the only practical alternative is to “sell the firm to the agent”: demand a lump-sum fee for the right to become a tax collector.  The agent has great incentives to generate tax revenue.  The principal extracts the tax collector’s expected profit upfront via the lump sum fee.  A classic two-part tariff.

According to Dexter Filkins in the New Yorker, here is how bribery works in Afghanistan:

Bribes feed bribes: if an Afghan aspires to be a district police officer, he must often pay a significant amount, around fifty thousand dollars, to his boss, who is usually the provincial police chief. The policeman earns back the money by shaking down ordinary Afghans… “It’s a vertically integrated criminal enterprise,” one American official told me.