Discussion Paper Details

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Title: Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach

Author(s): Daron Acemoglu and Thierry Verdier

Publication Date: October 1996

Keyword(s): Allocation of Talent, Corruption, Development, Law Enforcement and Property Rights

Programme Area(s): International Macroeconomics

Abstract: We consider an economy where property rights are necessary to ensure sufficient rewards to ex-ante investments. Because enforcement of property rights influences the ex-post distribution of rents, there is room for corruption. We characterize the optimal organization of society and the optimal degree of property rights enforcement subject to incentive constraints of the agents. We find that three frequently mentioned government failures arise quite naturally as part of the optimal mechanism: i) rents to government employees; ii) corruption; and iii) misallocation of talent. Therefore, these observations are not by themselves proof of government failure. We also discover that the general equilibrium aspect of our model leads to a number of new results: there may exist a free lunch such that over a certain range it is possible to simultaneously reduce corruption and the misallocation of talent, and increase investment. It will also often be the case that bureaucracies will impose a certain amount of self discipline.

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Bibliographic Reference

Acemoglu, D and Verdier, T. 1996. 'Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach'. London, Centre for Economic Policy Research.