INCOMPLETE PROPERTY RIGHTS, REDISTRIBUTION, AND WELFARE

In a world where the private protection of property is costly, government redistribution can lead to an increase in aggregate output. This result is not new. The novelty of this paper lies in specifying the conditions under which this efficiency-enhancing redistribution improves everyone’s welfare including the welfare of those whose labor finances the redistributive program (i.e., the rich) and how this is affected by the protection of property rights. The state may directly enhance economic rights through investments in security and the protection of property or it may indirectly do so through the redistribution of income. Under certain conditions, redistribution becomes desirable in situations where the state has exhausted its ability to enhance efficiency through the direct enforcement of property rights. In this case, redistribution can make all members of a society better off. Specifically, this occurs when the cost of predation is sufficiently low and the technology of private protection of property rights is sufficiently weak. The adverse effects of redistribution may be the consequence but not the cause of state failure. The real cause is a corrupt and inept state

INCOMPLETE PROPERTY RIGHTS, REDISTRIBUTION, AND WELFARE

In a world where the private protection of property is costly, government redistribution can lead to an increase in aggregate output. This result is not new. The novelty of this paper lies in specifying the conditions under which this efficiency-enhancing redistribution improves everyone’s welfare including the welfare of those whose labor finances the redistributive program (i.e., the rich) and how this is affected by the protection of property rights. The state may directly enhance economic rights through investments in security and the protection of property or it may indirectly do so through the redistribution of income. Under certain conditions, redistribution becomes desirable in situations where the state has exhausted its ability to enhance efficiency through the direct enforcement of property rights. In this case, redistribution can make all members of a society better off. Specifically, this occurs when the cost of predation is sufficiently low and the technology of private protection of property rights is sufficiently weak. The adverse effects of redistribution may be the consequence but not the cause of state failure. The real cause is a corrupt and inept state

Predation, Institutional Quality and Economic Growth.

This study develops a theoretical a model to examine the impact of predation on aggregate output and aggregate consumption. Using game theoretic framework we show that predation, reduces aggregate output and per capita consumption. Predation occurs when some agents enjoy comparative advantage in predation. Given predation under comparative advantage of some agents, a larger part of the aggregate output accrues to the predators. We also demonstrate that given inequality of endowments, the poorly endowed enjoys an incentive to predate. The payoff of the well endowed from production and predation is the same. Therefore the well endowed has no incentive to predate. If the well endowed still predates this would be owed to his comparative advantage in predation rather than the inequality per se. Large endowments are only one of the numerous sources that afford such comparative advantage. Good institutions like rule of law and effective government tame this comparative advantage. It is due to this kind of taming, that despite significant inequality in some economies, the level of predation observed is relatively low. Institutional quality thus determines the level of predation. We also show that redistribution from well endowed to poorly endowed will not only increase per capita consumption but will also be a ‗Pareto improvement‘. JEL classification: D03, O43, P14 Keywords: Predation, Institutions, Growt

Incomplete Property Rights and Overinvestment

I consider a model in which an asset owner must decide how much to invest in his asset mindful of the fact that an encroacher’s valuation of the asset is increasing in the asset owner’s investment. Due to incomplete property rights, the encroacher and asset owner engage in a contest over the control of the asset after investment has taken place. A standard result is that the asset owner will underinvest in the asset relative to the first-best level of investment when property rights are complete. Contrary to this standard result, I find that when the interaction between the asset owner and the encroacher is infinitely repeated and the encroacher has some bargaining power over the size of the transfer from the asset owner to him, then there is a cooperative equilibrium in which the asset owner finds it optimal to over-invest in the asset when property rights are incomplete relative to the first-best level of investment when property rights are complete. Overinvestment is used to induce cooperation. However, this result depends on the encroacher’s bargaining power or, more generally, whether the transfer is an increasing function of investment.contests, incomplete information, property rights, investment, transfers

Incomplete Property Rights and Overinvestment

I consider a model in which an asset owner must decide how much to invest in his asset mindful of the fact that an encroacher’s valuation of the asset is increasing in the asset owner’s investment. Due to incomplete property rights, the encroacher and asset owner engage in a contest over the control of the asset after investment has taken place. A standard result is that the asset owner will underinvest in the asset relative to the first-best level of investment when property rights are complete. To check the robustness of this result, I extend the benchmark model by changing (i) the nature of competition over property rights, (ii) the information that the players have about each other, (iii) the duration of the interaction between the players, and (iv) the bargaining power of the encroacher. Contrary to recent results, I find that when the interaction between the asset owner and the encroacher is infinitely repeated and the encroacher has some bargaining power over the size of the transfer from the asset owner to him, then there is a cooperative equilibrium in which the asset owner finds it optimal to over-invest in the asset when property rights are incomplete relative to the first-best level of investment when property rights are complete. Overinvestment is used to induce cooperation. However, this result depends on the nature of transfers or the encroacher’s bargaining power.contests, incomplete information, property rights, investment, transfers

Consumers' Complaints, the Nature of Corruption, and Social Welfare

A primary means of bureaucratic oversight is consumer complaints. Yet, this important control mechanism has received very little attention in the literature on corruption. I study a model of corruption with incomplete information in which consumers require a government service from officials who may be corrupt. A victim of corruption can report corrupt officials to higher-ranking officials (supervisors) who may be corrupt or honest. I find that social welfare may be non-monotonic in the proportion of honest supervisors. In some cases, an increase in the proportion of honest supervisors increases social welfare only if there is a critical mass of honest supervisors. Under certain conditions, there is, surprisingly, an equilibrium in which no one reports corruption regardless of the proportion of honest supervisors although all lower-ranking officials are corrupt. The analysis shows that using an increase in consumer complaints as a measure of the success of an anti-corruption campaign may be wrong because the consumers may benefit in other ways (e.g., a fall in the equilibrium bribe). I also fill a gap in the literature by endogenizing an official's decision to engage in "corruption with theft" or "corruption without theft" as defined by Shleifer and Vishny (1993) and use the model to shed light on recent anti-corruption initiatives such as the Punjab Citizen Feedback Model in Pakistan and a recent proposal by Kaushik Basu (2012)