The authors analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups. Powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock. In equilibrium, this leads to slow economic growth and a 'voracity effect,' by which a shock, such as a terms of trade windfall, perversely generates a more-than-proportionate increase in fiscal redistribution and reduces growth. The authors also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks.

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Why is it that resource-rich countries tend to have lower growth rates than resource-poor countries? And why is it that many countries that enjoy terms-of-trade windfalls end up with lower growth rates? To explain these puzzles, we extend the neoclassical growth model by replacing the representative agent with multiple powerful groups and by introducing a new concept, the voracity effect--a more than proportional increase in redistribution in response to an increase in the raw rate of return. We show that, in an economy with powerful groups and weak institutions, the voracity effect operates if the elasticity of intertemporal substitution is high enough. That is, there exists a negative relationship between the growth rate and the raw rate of return, which is positively related to the terms of trade. We provide some empirical evidence in support of the mechanism we propose.

We analyze a differential game in which all interest groups have access to a common capital stock. We show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons. We use this model to analyze capital flight: in many poor countries, property rights are not well defined; since "safe" bank accounts in rich countries (the inferior technology) are available to citizens of these countries, they engage in capital flight. We show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare.We are grateful to A "tragedy of the commons" occurs when property rights over a productive asset are ill defined or cannot be enforced. The classic examples involve cattle grazing in a common pasture or vessels fishing in a lake. Typically, the literature shows that common access leads to overconsumption and underinvestment (see Gordon 1954; Lancaster 1973; Levhari and Mirman 1980; Reinganum and Stokey 1985; Haurie and Pohjola 1987; Benhabib and Radner 1988). This paper shows that introducing a technology with inferior productivity, but private access, into a common-access economy will, under some circumstances, ameliorate the tragedy of the commons and increase welfare. This runs contrary to simple intuition, which might suggest that adding an inferior technology is at best irrelevant, as is the case in a representative agent model. We present a differential game among interest groups. Each group has an infinite horizon and maximizes lifetime utility derived from consumption. Two technologies can produce the single consumption good: one has common access, meaning that every group can appropriate any share it desires from the common capital stock; the other enjoys private access as in the neoclassical growth model. Both technologies have constant physical rates of return, with the commonaccess technology having a higher one.We analyze three symmetric Nash equilibria of the two-asset economy: one interior and two extreme. At the interior equilibrium, the appropriation rate must be such that the private rate of return on the common-access technology is equal to the rate of return on the inferior, private-access technology. Otherwise, there would be unexploited arbitrage opportunities.It follows that the introduction of the inferior technology into a one-asset common-access economy puts a floor on the common-access asset's rate of return and, thus, a ceiling on the appropriation rate. If this constraint is binding, interest groups will be forced to reduce their appropriation rate. This will increase aggregate capital accumulation, ameliorate the tragedy of the commons, and increase welfare. This result has strong implications for capital flight and economic growth. Capital flight occurs when productive resources flow from poor to rich countries.' This phenomenon apparently contradicts the standard two-factor neoclassical growth model: since poor countries have a lower capital/labor ratio, and thus a higher...