Wealth Inequality and Collective Action

We analyze the effect of inequality in the distribution of endowment of a private input (briefly,wealth) that is complementary in production with a collective input on effciency. The collective inputis the outcome of a collective action problem (e.g., contribution to pure or impure public goods andextraction from common-property resources). In an environment where transactions costs preventthe effcient allocation of the private input across individuals, and the collective action problem isresolved in a decentralized manner, we characterize the optimal second-best distribution of wealth.We show that while effciency increases with greater equality within the group of contributors andnon-contributors, in some situations there is an optimal degree of inequality between the groups,thereby locating Olson's original insight in a more general framework.[...]