The Tyranny of Inequality
Journal of Public Economics, Vol. 76, No. 3, Pp. 521-558, June 2000
Posted: 6 Jan 2001
When parties are very unequally endowed, agreement may be very difficult to reach, even if the specific transaction is easy to contract on, and fungible resources can be transferred to compensate the losing party. The very fungibility of the transferred resource makes it hard to restrict its use, and changes the amount the parties involved spend in trying to grab future rents. This spill-over effect can inhibit otherwise valuable transactions, as well as enable otherwise inefficient transactions. Agreement typically breaks down when the required transfer is large and the proposed recipient of the transfer is relatively unproductive or poorly endowed. We examine the implications of this model for a theory of the optimal allocation of property rights.
JEL Classification: C78, D82
Suggested Citation: Suggested Citation