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The voracity effect revisited

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  • Strulik, Holger

Abstract

In an influential article Tornell and Lane (1999) considered an economy, populated by multiple powerful groups, in which property rights in the formal sector are not protected. They argued that then investment in an informal sector may be optimal and set up conditions for “voracity” such that a permanent positive shock in the formal sector leads to lower economic growth. Here I show that whenever investing in the informal sector is feasible, not investing in the informal sector is a Pareto-superior Nash equilibrium under the mild condition of an elasticity of intertemporal substitution in consumption smaller than unity. As a corollary, voracity disappears.

Suggested Citation

  • Strulik, Holger, 2012. "The voracity effect revisited," Mathematical Social Sciences, Elsevier, vol. 64(3), pages 272-276.
    • Handle: RePEc:eee:matsoc:v:64:y:2012:i:3:p:272-276
    DOI: 10.1016/j.mathsocsci.2012.05.007
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    References listed on IDEAS

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    1. Ines Lindner & Holger Strulik, 2008. "Social Fractionalization, Endogenous Appropriation Norms, and Economic Development," Economica, London School of Economics and Political Science, vol. 75(298), pages 244-258, May.
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    8. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    9. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
    10. Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 507-534, December.
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    12. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
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