Hi Salvador, I saw the video that you shared and I found it very interesting. After that, I searched for papers related to the externalities from a lack of property rights and I found this very interesting paper that relates to the problem you described and also to the General Equilibrium approach that we studied in the 1st Chapter: Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach.(Daron Acemoglu and Thierry Verdier).
In this paper, the authors analyze the role of the government/state in enforcing property rights as a way to correct the market failure that arises from contractual problems between private parties. They say, that without the existence of the government to enforce contracts, these contracts would be incomplete as the payment promises would not be credible. Therefore, the state and its employees must ensure that contracts are enforced. However, a second problem/externality may appear when the government employees assigned to enforce the contracts abuse of their power and side with one of the parts of the contract (corruption). The prevention of this second externality, is also vital to achieve property rights enforcement.
To model this, they consider an economy where the enforcement of contracts is essential to promote investment, and therefore to achieve growth. They also use “efficiency wages” as a method to prevent corruption: state employees are highly paid, but they lose these high-wages if they are caught taking bribes. Finally, this relatively higher wages create a problem of misallocation of talent as some workers without competitive advantage in the public sector might be attracted by the rents of the same.
Finally, and after doing the economical analysis of their model, the authors found 3 interesting results:
- At equilibrium, there is a socially optimal corruption level as well as a less than full level of property rights enforcement. This happens because the prevention of both activities is costly
- They found that less developed countries usually chose lower levels of contract enforcement and higher corruption levels. I believe this point relates with the history described by Elena Panarities in the TED talk that you shared.
- Finally, they found that there is a range where the externality from the high public sector wages is solved. This happens because the better property rights induced by higher wages make the private sector more attractive for entrepreneurs (therefore workers would go to the sector where they have a competitive advantage and not to the sector with higher rents).
- Acemoglu, Daron and Verdier, Thierry. Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach. The Economic Journal, Vol. 108, No. 450 (Sep., 1998), pp. 1381-1403