The Creation of the Rule of Law and the Legitimacy of Property Rights: The Political and Economic Consequences of a Corrupt Privatization

51 Pages Posted: 16 Feb 2006 Last revised: 2 Sep 2010

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Karla Hoff

World Bank - Development Economics Group (DEC); World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

Abstract

How does the lack of legitimacy of property rights affect the dynamics of the creation of the rule of law? We investigate the demand for the rule of law in post-Communist economies after privatization under the assumption that theft is possible, that those who have "stolen" assets cannot be fully protected under a change in the legal regime towards rule of law, and that the number of agents with control rights over assets is large. We show that a demand for broadly beneficial legal reform may not emerge because the expectation of weak legal institutions increases the expected relative return to stripping assets, and strippers may gain from a weak and corrupt state. The outcome can be inefficient even from the narrow perspective of the asset-strippers.

Suggested Citation

Stiglitz, Joseph E. and Hoff, Karla, The Creation of the Rule of Law and the Legitimacy of Property Rights: The Political and Economic Consequences of a Corrupt Privatization (November 2005). NBER Working Paper No. w11772. Available at SSRN: https://ssrn.com/abstract=847044

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Karla Hoff

World Bank - Development Economics Group (DEC) ( email )

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World Bank - Development Research Group (DECRG)

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