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The Creation of the Rule of Law and the Legitimacy of Property Rights: The Political and Economic Consequences of a Corrupt Privatization

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  • Karla Hoff
  • Joseph E. Stiglitz

Abstract

How does the lack of legitimacy of property rights affect the dynamics of the creation of the rule of law? We investigate the demand for the rule of law in post-Communist economies after privatization under the assumption that theft is possible, that those who have "stolen" assets cannot be fully protected under a change in the legal regime towards rule of law, and that the number of agents with control rights over assets is large. We show that a demand for broadly beneficial legal reform may not emerge because the expectation of weak legal institutions increases the expected relative return to stripping assets, and strippers may gain from a weak and corrupt state. The outcome can be inefficient even from the narrow perspective of the asset-strippers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11772.

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Date of creation: Nov 2005
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Handle: RePEc:nbr:nberwo:11772

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  1. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
  2. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer.
  3. John Haltiwanger, 1987. "Responders Versus Nonresponders: A New Perspective on Heterogeneity," UCLA Economics Working Papers 436, UCLA Department of Economics.
  4. Karla Hoff & Joseph E. Stiglitz, 2002. "After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies," NBER Working Papers 9282, National Bureau of Economic Research, Inc.
  5. Roland, Gerard & Verdier, Thierry, 2003. "Law enforcement and transition," European Economic Review, Elsevier, vol. 47(4), pages 669-685, August.
  6. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  7. Kolodko, Grzegorz W., 2000. "From Shock to Therapy: The Political Economy of Postsocialist Transformation," OUP Catalogue, Oxford University Press, number 9780198297437, Octomber.
  8. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-14, May.
  9. Dyck, Alexander & Zingales, Luigi, 2002. "The Corporate Governance Role of the Media," CEPR Discussion Papers 3630, C.E.P.R. Discussion Papers.
  10. Daron Acemoglu, 1993. "Reward Structures and the Allocation of Talent," CEP Discussion Papers dp0143, Centre for Economic Performance, LSE.
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Cited by:
  1. Raynouard, Arnaud & Kerhuel, Anne-Julie, 2011. "Measuring the law: Sécurité juridique as a watermark," Economics Papers from University Paris Dauphine 123456789/11683, Paris Dauphine University.
  2. Davis, Junior, 2006. "Learning from local economic development experiences: Observations on Integrated Development Programmes of the Free State, Republic of South Africa," MPRA Paper 26045, University Library of Munich, Germany.
  3. Stefano Porcelli, 2009. "Civilian Tradition and the Chinese Company Law," Transition Studies Review, Springer, vol. 16(2), pages 438-449, June.
  4. R. L. Bruno, 2008. "Rule of Law, Institutional Quality and Information," Working Papers 634, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. David Martimort & Stephane Straub, 2006. "Privatization and Changes in Corruption Patterns: The Roots of Public Discontent," ESE Discussion Papers 147, Edinburgh School of Economics, University of Edinburgh.
  6. Enrico Colombatto, 2007. "It was the rule of law. Will it be the rule of judges?," ICER Working Papers 41-2007, ICER - International Centre for Economic Research.
  7. Martimort, David & Straub, Stéphane, 2009. "Infrastructure privatization and changes in corruption patterns: The roots of public discontent," Journal of Development Economics, Elsevier, vol. 90(1), pages 69-84, September.

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