Insecure Property Rights and Growth: The Roles of Appropriation Costs, Wealth Effects, and Heterogeneity

CESifo Working Paper No. 1253

Insecure Property Rights and Growth:
The Roles of Appropriation Costs, Wealth
Effects, and Heterogeneity

Abstract

We extend the model of insecure property rights by Tornell and Velasco (1992) and Tornell
and Lane (1999) by adding three features: (i) extracting the common property asset involves a
private appropriation cost, (ii) agents derive utility from wealth as well as from consumption,
and (iii) agents can be heterogeneous. We show that both an increase in the appropriation cost
and, when appropriation costs vary across agents, an increase in the degree of heterogeneity
of these costs reduce the growth rate of the public capital stock. We also show that, in the
interior equilibrium, the private asset can have either a lower or a higher money rate of return
than the common property asset.

JEL Code: C73, O40.

Keywords: corruption, property rights, growth, appropriation cost.

Gerhard Sorger

Department of Economics
University of Vienna
Hohenstaufengasse 9
A-1010 Vienna
Austria

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