Incomplete property rights, redistribution, and welfare

In a world where the private protection of property is costly, government redistribution can lead to an increase in aggregate output. This result is not new. The novelty of this paper lies in specifying the conditions under which this efficiency-enhancing redistribution improves everyone’s welfare including the welfare of those whose labor finances the redistributive program (i.e., the rich) and how this is affected by the protection of property rights. The state may directly enhance economic rights through investments in security and the protection of property or it may indirectly do so through the redistribution of income. Under certain conditions, redistribution becomes desirable in situations where the state has exhausted its ability to enhance efficiency through the direct enforcement of property rights. In this case, redistribution can make all members of a society better off. Specifically, this occurs when the cost of predation is sufficiently low and the technology of private protection of property rights is sufficiently weak. The adverse effects of redistribution may be the consequence but not the cause of state failure. The real cause is a corrupt and inept state. My thanks are due to an anonymous referee and Zane Spindler for very helpful and critical comments. I thank SSHRC for financial support