Property Rights, Predation, and Productivity*

• DOI: http://doi.org/10.1111/sjoe.12294
• Published date: 01 July 2019
• Date: 01 July 2019
• Author: Fernando Río

Scand. J. of Economics 121(3), 1154–1188, 2019

DOI: 10.1111/sjoe.12294

Property Rights, Predation, and

Productivity*

Fernando del R´ıo

University of Santiago de Compostela, 15782 Santiago de Compostela, Spain

fernando.delrio@usc.es

Abstract

I develop a neoclassical growth model with imperfect property rights in which predation entails

both waste of resources and deadweight losses.According to the model, in the United States, the

welfare costs of crime represent a loss of 18.6 percent of consumption per capita.This loss is 57.8

percent for a country in the average of the last decile of the distribution of an index of business

costs of crime across 94 countries. An increase of one standard deviation in the institutional

quality index increases GDP per worker by 23 percent for a country in the average of the last

decile of its distribution.

Keywords: Business costs of crime; cross-country differences in TFP and GDP per worker;

institutions; rent-seeking; welfare costs of crime

JEL classification:O10; O43; O47

I. Introduction

Property rights are an important component of the institutional structure

of a society, which shapes incentives in human interaction. The new

institutional approach to economic development (North, 1990) emphasizes

the importance of institutions in determining the incentives faced by

economic agents. In particular, security of property rights affects resource

allocation by shaping the incentives of individuals to carry out productive

activities, because it limits expropriation risks and reduces the need to

divert private resources to protect property. Moreover, as pointed out by

Besley and Ghatak (2010), security of property rights also affects the

efficiency of resource allocation facilitating trade in assets and improving

collateralizability of assets.

Economic agents face the choice of allocating resources between

production (i.e., to produce something useful for others) and predation

(i.e., to appropriate the property of others). Predation affects productivity

negatively because it entails a waste of resources as well as deadweight

*The author gratefully acknowledges financial support from the Xunta de Galicia research

program 2016-PG032.

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The editors of The Scandinavian Journal of Economics 2018.

F. del R´ıo 1155

y = 1.2607x + 0.0867

R² = 0.5795

-2

-1.5

-1

-0.5

0

0.5

-1 -0.8 -0.6 -0.4 -0.2 0 0.2

Index of business costs of crime

Index of quality of formal institutions securing property rights

Fig. 1. Security of property rights and the business costs of predation

Notes: Both variables are in logs and relative to the United States.The solid line is the regression line fitted to the

data. The index of business costs of crime is a component of the Economic Freedom of the World Index (EFW)

elaborated bythe Fraser Institute (US = 1). The indexof security of proper ty rights is an arithmetic averageof eight

indices related to the legal structure and security of property rights in a country used to build the EFW (judicial

independence, impartial courts, protection of property rights, military interference in rule of law and the political

process,integrity of the legal system, legal enforcement of contracts, regulatory restrictions on the sale of real property,

and reliability of police) (US = 1). Data on both indices are for year 2005.

losses.1Some authors have highlighted the importance of the allocation

of talent between productive and unproductive activities for the economic

performance of a society (e.g., Baumol, 1990; Murphy et al., 1991;

Acemoglu and Verdier, 1998). These authors argued that entrepreneurial

talent can be reallocated towards rent-seeking and organized crime when

the returns to such activities are high relative to producing.

Some empirical evidence suggests that both predation and quality of

formal institutions securing property rights differ greatly across countries.

Figure 1 shows a significant positive relationship between an index of

business costs of crime (a higher value of the index means lower business

costs of crime) and a quality index of formal institutions securing property

1A deadweight loss is a cost to society created by market inefficiency, which leads to a society

with fewer available resources, while the waste of resources refers to the unproductive use of

available resources.

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The editors of The Scandinavian Journal of Economics 2018.

1156 Property rights, predation, and productivity

y = 1.3146x -0.9961

R² = 0.3191

-5

-4

-3

-2

-1

0

1

4.

0

1

.0-

6

.0-

1

.

1-

6.

1-

GDP per worker

Index of business costs of crime

Fig. 2. Business costs of predation and GDP per worker

Notes: Both variables are in logs and relative to the United States.The solid line is the regression line fitted to the

data. The index of business costs of crime is a component of the EFW elaborated by the Fraser Institute (US = 1).

Data on GDP per worker are taken from the PWT 8.0. Data are for year2005.

rights for a sample of 94 countries.2Figures 2 and 3 show that both the

business costs of crime and the quality of formal institutions securing

property rights are respectively related – negatively and positively – with

gross domestic product (GDP) per worker. Finally, Figures 4 and 5 show

that institutional quality and total factor productivity (TFP) are significantly

and positively related, while institutional quality and the ratio of capital

to GDP are not. Therefore, empirical evidence suggests that if security of

property rights influences GDP per worker, then it is is mostly through

TFP.3

The objective of this study is to provide a tractable neoclassical growth

model with imperfect property rights and predation, which can be used

in quantitative analysis. In particular, it can be used to evaluate the

2Data are provided by the Fraser Institute. More details about these indices are given in

Section III.

3Using instrumental variables in a cross-country study, Acemoglu et al. (2001) argued that

the positive relationship between security of property rights and GDP per worker is indeed

causal.

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The editors of The Scandinavian Journal of Economics 2018.