Insecure property rights and growth: the role of appropriation costs, wealth effects, and heterogeneity

Summary. We extend the model from Tornell and Velasco 13] and Tornell and Lane 12] by adding three features: (i) extracting the common property asset involves a private appropriation cost, (ii) agents derive utility from wealth as well as from consumption, and (iii) agents can be heterogeneous. We show that both an increase in the appropriation cost and, when appropriation costs vary across agents, an increase in the degree of heterogeneity of these costs reduce the growth rate of the public capital stock. We also show that, in the interior equilibrium, the private asset can have either a lower or a higher money rate of return than the common property asset.Received: 22 June 2004, Revised: 20 April 2005, JEL Classification Numbers: C73, O40.This research is supported by SSHRC, FQRSC, and the Austrian Science Fund (FWF). Thanks are due to Hassan Benchekroun, Parkash Chander, Gerard Gaudet, Basant Kapur, Kim Long, Colin Rowat, Koji Shimomura, and an anonymous referee for comments and discussions.