Oligarchic Property Rights and Investment

We consider a dynamic model of an economy where productive capital can be owned only by the members of an elite oligarchy, because property rights and contracts are effectively enforced only by their private political networks. This private protection entails a degree of ownership security that is good but not perfect. We find that the performance of the economy will depend critically on oligarchs' ability to ensure themselves against political risks by issuing financial claims against their capital assets. When political risks can be shared in this way, freemarket reforms can stimulate economic growth. But when distrust prevents oligarchs from sharing their political risks, free-market reforms can cause a capital flight and severe contraction, resembling the actual Russian experience in the 1990s. In some cases, better protection of property would reduce the oligarchs' welfare, by stimulating investments that decrease returns to capital. The model is calibrated to fit some of the Russian macroeconomic data. [JEL classification numbers: F43, O10, P14] Chicago and Buffalo, July, 2003 ∗ Department of Economics, State University of New York at Buffalo, Buffalo, NY 14260-1520; and Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637. Internet addresses: http://pluto.fss.buffalo.edu/classes/eco/sb56/, http://home.uchicago.edu/~rmyerson/ We thank Fernando Alvarez, Robert E. Lucas Jr., Atsushi Ohyama, Vitaly Shvydko, Konstantin Sonin and Nancy Stokey for helpful comments. All errors are ours.