Input Markets Development, Property Rights, and Extra-Market Redistribution

Abstract

The paper links the intensity of re-distributional activities within an economy to the availability of the input markets. When an individual is faced with a choice between productive vs non-productive (re-distributional) activities, the outcome heavily depends on whether this individual can match his/her personal endowment of human resources (labor, entrepreneurial talent, skills etc.) with commensurable quantities of transferable economic inputs, which are required to complement the human resources in production technologies. If the markets for these inputs are missed or impeded, rational individuals could be forced into re-distribution, where "technologies" do not require matching inputs. However, the development of the input markets alone is not sufficient to suppress redistributional activities. Another factor to be taken into account is the degree of protection of property rights. An equilibrium model is presented to demonstrate that if property rights are adequately protected, then opening of the input markets undermines the incentive to seek re-distributional gains. On the other hand, if property rights are protected poorly, making input markets available could further stimulate re-distribution, as the society is getting richer, and the rate of return to re-distributional efforts goes up. Implications of the above observations for institutional change and economic reform are briefly discussed in conclusion.