The Enforcement of Property Rights and Underdevelopment

IMF Working Papers, September 1, 1999

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The Enforcement of Property Rights and Underdevelopment

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Bibliographic details

• Authors: Era Dabla-Norris, Scott Freeman
• Published: September 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451854961.001

Summary

• This paper formalizes the role of legal infrastructure in economic development in a general equilibrium model with endogenously determined property rights enforcement.
• The model illustrates the mutual importance of property rights protection and market production by a multiplicity of equilibria:
  • In one equilibrium, property rights are enforced and market activity is unhampered.
  • In the other equilibrium, property rights are not enforced, which discourages economic activity and leaves the economy without the resources and incentives to enforce property rights.
• The paper highlights that even identically endowed economies may find themselves in very different equilibria.

Model and Mechanism

• Framework: general equilibrium model with endogenous determination of property rights enforcement.
• Core mechanism:
  • Property rights enforcement and market production are mutually reinforcing.
  • Enforcement requires resources and incentives that derive from economic activity.
  • Lack of enforcement reduces expected returns to market activity, suppressing the resource base needed for enforcement.

Main Findings

• Existence of multiple equilibria characterized by starkly different outcomes for market activity and property rights enforcement.
• A non-enforcement equilibrium is self-reinforcing: low enforcement → low economic activity → insufficient resources/incentives to enforce property rights.
• Identically endowed economies can diverge into different equilibria solely due to differences in enforcement dynamics.

Implications

• Legal infrastructure and enforcement capacity are central to economic development outcomes.
• Strengthening property rights enforcement can be pivotal to moving an economy from a low-activity equilibrium to a high-activity equilibrium (as implied by the model’s structure and multiplicity of equilibria).

Content in this bundle

• The Enforcement of Property Rights and Underdevelopment - WP/99/127
  • The Enforcement of Property Rights and Underdevelopment - WP/99/127 (Markdown version)
  • The Enforcement of Property Rights and Underdevelopment - WP/99/127 (PDF)