Optimal Protection of Property Rights in a General Equilibrium Model of Growth*


  • *

    We are grateful to an anonymous referee for many constructive criticisms and suggestions. We also thank K. Angelopoulos and V. Vassilatos for discussions. Any errors are ours.


We incorporate weak property rights into an otherwise standard general equilibrium model of growth and second-best optimal policy. In this setup, the state plays two of its key roles: it protects property rights and provides public services. The government chooses policy (the income tax rate, as well as the allocation of collected tax revenues between law enforcement and public services) to maximize the growth rate of the economy. The focus of our analysis is on how weak property rights generate multiple decentralized competitive equilibria, the different properties of these equilibria, and the implications of second-best optimal policies.