Why the Rich May Favor Poor Protection of Property Rights

Abstract

In unequal societies, the rich might benefit from shaping economic institutions into their favor. This paper analyzes the dynamics of institutional subversion focusing on one particular institution, public protection of property rights. If this institution is imperfect, agents have incentives to invest in private protection of property rights. With economies of scale in private protection, rich agents have a significant advantage: they could expropriate other agents using their private protection capacities. Ability to maintain private protection system makes the rich natural opponents of full protection of property rights provided by the state. Such an environment does not allow grass-roots demand to drive development of new market-friendly institutions (such as public protection of property rights). The economy as a whole is stuck in a ’bad’ long-run equilibrium with low growth rate, high inequality, and wide-spread rent-seeking. The Russian ‘oligarchs’ of 1990s, a handful of politically powerful agents that controlled large stakes of newly privatized property, we re the major motivation for this paper.