Working Paper: CEPR ID: DP1494
Authors: Daron Acemoglu; Thierry Verdier
Abstract: We consider an economy where property rights are necessary to ensure sufficient rewards to ex-ante investments. Because enforcement of property rights influences the ex-post distribution of rents, there is room for corruption. We characterize the optimal organization of society and the optimal degree of property rights enforcement subject to incentive constraints of the agents. We find that three frequently mentioned government failures arise quite naturally as part of the optimal mechanism: i) rents to government employees; ii) corruption; and iii) misallocation of talent. Therefore, these observations are not by themselves proof of government failure. We also discover that the general equilibrium aspect of our model leads to a number of new results: there may exist a free lunch such that over a certain range it is possible to simultaneously reduce corruption and the misallocation of talent, and increase investment. It will also often be the case that bureaucracies will impose a certain amount of self discipline.
Keywords: property rights; corruption; allocation of talent; law enforcement; development
JEL Codes: D22; H40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| property rights enforcement (P14) | investment incentives (O31) |
| higher public sector wages (J45) | reduced corruption (H57) |
| higher public sector wages (J45) | improved allocation of talent (D29) |
| higher public sector wages (J45) | reduced corruption and improved allocation of talent (D73) |
| economic structure (L16) | degree of property rights enforcement (P14) |
| optimal organization of society (D71) | acceptance of some level of corruption and misallocation of talent (D73) |
| property rights enforcement (P14) | investment stimulation (O31) |