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Abstract

Weak property rights over ‘own fruits of labor’ can provoke appropriative conflicts. However, the recognition of consequent resource-misallocation and value-destruction can encourage collective action towards improving property rights enforcement. We model two (pre-modern) communities populated by a sequence of myopic generations, initially located in a weak property-rights regime with unequal resources. In every generation, the communities costlessly strengthen, or weaken, inherited property rights by mutual consent, and then allocate inherited resources (whose amounts depend on past production and consumption) towards value creation and capture. The co-evolution of the property rights regime and resource inequality does not guarantee the emergence of perfect property rights enforcement in the long-run, essentially due to perverse incentives of the resource-poorer community. In fact, when initial resource-inequality is significant and /or the level of past productive investment (rather than the level of past consumption) is the dominant driver of a community’s resource-growth, the poorer community drags the richer community into perpetual anarchy. When the communities are on an equilibrium path of devolution to anarchy, a policy intervention that exogenously and permanently imposes perfect property rights on them can lead to higher aggregate resource growth and higher welfare in each community in the long run, but can also cause an initial set of generations in the poorer community to be worse off compared to the laissez faire equilibrium path.