1 Introduction
Recently, there has been increased interest in studying economic growth in the absence of secure
property rights and the presence of multiple organized and, hence, powerful groups in society;
see, e.g., Tornell [9], Tornell and Lane [5, 10], Tornell and Velasco [11], or Lindner and Stru-
lik [6]. When legal or political institutions are weak, powerful groups can influence the fiscal
process and thereby in effect redistribute the economywide capital stock among themselves. The
development of the economy is therefore more appropriately described by a dynamic resource
allocation game than by a traditional neoclassical growth model with perfect competition. Pur-
suing this line of thought, the above mentioned papers study one-sector growth models with
finitely many agents (the power groups) who share access to the economy’s capital stock. Be-
cause the capital stock in these models is a common property asset, the familiar tragedy of the
commons becomes relevant: the powerful groups do not internalize the negative effects which
their appropriation efforts have on the production capacity of the entire economy and, hence,
economic growth is inefficiently low.
Tornell and Velasco [11] and Tornell and Lane [10] add another interesting feature to this
general setup: they assume that the players can extract resources from the public and insecure
capital stock and convert them into private and secure asset holdings. The private asset stocks
could be interpreted, for example, as bank accounts in foreign countries in which property
rights are secure. In the models studied in Tornell and Velasco [11] and Tornell and Lane [10],
the extraction from the common property asset stock is costless and the authors claim that
“including appropriation or adjustment costs would add nothing to the insights provided by the
model” [10, p. 26].1 We believe, however, that an explicit consideration of costs of appropriation
is important. A model that takes appropriation costs into account is not only more realistic
(after all, money laundering and lobbying involve the use of real resources) but, as our analysis
shows, it also yields new insights and modifies a few key results from Tornell and Velasco [11] and
Tornell and Lane [10] in non-trivial ways. As for the new results, we can show for example 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. Thus, we have the striking result that high costs of money laundering are detrimental to
economic growth.
We also add another feature to the analysis, namely that the agents derive utility not only
from consumption but also from their wealth. Wealth is a vehicle for achieving social status,
and people do care about social status. Cole et al. [1] argue forcefully that status seeking is a
strong motive for economic agents, especially if goods are not allocated through well-functioning
markets.2 Including wealth as a ranking device in the utility functions of the power groups
1 Their main results are as follows. First, the existence of powerful groups reduces the growth rate. Second,
an increase in the number of groups leads to better economic performance. And, third, an increase in the raw
rate of return to the common property asset reduces its growth rate (the voracity effect).
2Cole et al. [1, p. 1092]) quote from The Theory of Moral Sentiments by Adam Smith: “To what purpose is
all the toil and bustle of the world? . . . It is our vanity that urges us on.... It is not wealth that men desire,
but the consideration and good opinion that wait upon riches.” Cole et al. [1] also quote from Material Girl by
Madonna: “The boy with the cold hard cash is always Mister Right because we are living in the material world