Predation, institutional quality and economic growth

Abstract

This study develops a theoretical a model to examine the impact of predation on aggregate output and aggregate consumption. Using game theoretic framework we show that predation, reduces aggregate output and per capita consumption. Predation occurs when some agents enjoy comparative advantage in predation. Given predation under comparative advantage of some agents, a larger part of the aggregate output accrues to the predators. We also demonstrate that given inequality of endowments, the poorly endowed enjoys an incentive to predate. The payoff of the well endowed from production and predation is the same. Therefore the well endowed has no incentive to predate. If the well endowed still predates this would be owed to his comparative advantage in predation rather than the inequality per se. Large endowments are only one of the numerous sources that afford such comparative advantage. Good institutions like rule of law and effective government tame this comparative advantage. It is due to this kind of taming, that despite significant inequality in some economies, the level of predation observed is relatively low. Institutional quality thus determines the level of predation. We also show that redistribution from well endowed to poorly endowed will not only increase per capita consumption but will also be a 'Pareto improvement'. © The Pakistan Development Review.