Working Paper: NBER ID: w11772
Authors: Karla Hoff; Joseph E. Stiglitz
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.
Keywords: Rule of Law; Property Rights; Privatization; Corruption
JEL Codes: K0; K4; P26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| privatization (L33) | control rights (P14) |
| control rights (P14) | demand for the rule of law (K40) |
| expectation of unlikely transition to the rule of law (P37) | asset stripping (G33) |
| asset stripping (G33) | weak and corrupt state (D73) |
| weak constituency for the rule of law (K19) | corrupt state (H57) |
| lack of legal enforcement (P37) | incentives for theft (K42) |
| incentives for theft (K42) | corrupt environment (D73) |