Good Fences Make Good Neighbors: Endogenous Property Rights in a Game of Conflict
This paper derives the conditions under which property rights can arise in an anarchy equilibrium. The creation of property rights requires that players devote part of their endowment to the public good of property rights protection. In the Nash equilibrium, players contribute zero to the protection of property rights. In contrast, a king who provides property rights protection paid for by a tax on endowments can completely eliminate conflict, but such a king has an incentive to take the surplus for himself. Thus players have an incentive to find a solution that keeps power in their own hands. In a social contract, players first credibly commit part of their endowments to providing property rights and then allocate the balance of their endowments between production and conflict. While property rights can arise under a social contract if the productivity of resources relative to the size of the population is sufficiently high, these property rights may be less than perfectly secure. Nevertheless, for sufficiently high productivity of resources relative to the size of the population, the social contract welfare dominates autocracy. Key Words:
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