Endogenous Property Rights

It is often argued that additional checks and balances provide economic agents with better protection from expropriation of their wealth or productive capital. We demonstrate that in a dynamic political economy model this intuition may be flawed. Surprisingly, increasing the number of veto players or the majority requirement for redistribution may reduce property right protection on the equilibrium path. The reason is the existence of two distinct mechanisms of property rights protection. One are formal constraints that allow individuals or groups to block any redistribution which is not in their favor. The other occurs in equilibrium where agents without such powers protect each other from redistribution. Players without formal blocking power anticipate that the expropriation of other similar players will ultimately hurt them and thus combine their influence to prevent redistributions. Yet, such incentives can be undermined by adding formal constraints. The flip-side of this effect is that individual investment efforts might require coordination. The model also predicts that the distribution of wealth in societies with weaker formal institutions (smaller supermajority requirements) among players without veto power will tend to be more homogenous