A model of insecure property rights

To illustrate the main ideas, consider the following model, which is similar to that developed by Skaperdas and Syropoulos (1996). There are two individuals, 1 and 2, and two scarce inputs into production: labour (L) and land (T). The production function for each individual is:

where T is the amount of land that individual i employs, and Lt is the amount of labour that i employs, and 0 < a < 1 is a productivity parameter. Suppose that individuals each begin with Rt units of labour, which is secure.

Secure property rights to land

If property rights over land are fully secure, then labour is fully employed in productive activities, and each individual's production is:

where 0 < a < 1. The Pareto-optimal allocations of land and labour solve:

subject to:

and the aggregate resource constraints T1 + T2 = T and R1 + R2 = R. The solution is the set of points where:

The contract curve

Figure 7.4.1 The contract curve

This is the horizontal line of the Edgeworth Box, as shown in Figure 7.4.1.

Aggregate production for this efficiently organised economy satisfies:

 
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