1 Capital and Growth with Oligarchic Property Rights

To analyze effects of imperfect property rights on economic growth, we consider economies where some fraction of capital can be owned only by local oligarchs, whose status is subject to political risk. Political risk decreases local capital and wages. Risk-averse oligarchs acquire safe foreign assets for insurance, thus increasing wages in other countries that protect outside investors. Reforms to decrease political risk or to protect more outsiders' investments can decrease local oligarchs' welfare by increasing wages. A severe depression occurs when a closed country opens to let its oligarchs invest abroad without protecting outside investors, as in 1990s Russia. [JEL classification numbers: F43, O10, P14] 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, Samuel Bowles, Robert E. Lucas Jr., Konstantin Sonin and Nancy Stokey for helpful comments. All errors are ours.