Endogenous Property Rights

36 Pages Posted: 13 Dec 2013

Date Written: December 2013

Abstract

It is often argued that additional checks and balances provide economic agents with better protection from expropriation of their wealth or productive capital. We demonstrate that in a dynamic political economy model this intuition may be flawed. Surprisingly, increasing the number of veto players or the majority requirement for redistribution may reduce property right protection on the equilibrium path. The reason is the existence of two distinct mechanisms of property rights protection. One are formal constraints that allow individuals or groups to block any redistribution which is not in their favor. The other occurs in equilibrium where agents without such powers protect each other from redistribution. Players without formal blocking power anticipate that the expropriation of other similar players will ultimately hurt them and thus combine their influence to prevent redistributions. Yet, such incentives can be undermined by adding formal constraints. The flip-side of this effect is that individual investment efforts might require coordination. The model also predicts that the distribution of wealth in societies with weaker formal institutions (smaller supermajority requirements) among players without veto power will tend to be more homogenous.

Suggested Citation

Diermeier, Daniel and Egorov, Georgy and Sonin, Konstantin, Endogenous Property Rights (December 2013). NBER Working Paper No. w19734. Available at SSRN: https://ssrn.com/abstract=2367144

Daniel Diermeier (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Georgy Egorov

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Konstantin Sonin

University of Chicago - Harris Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Higher School of Economics ( email )

20 Myasnitskaya street
Moscow, 119017
Russia

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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