Public security, technology adoption and welfare implications in an insecure property rights environment

Abstract

In this paper, we study the role of a tax-funded public security system in superior technology adoption by strategic agents and consequent welfare implications of improvement in property security in an environment where rights to private property are completely insecure. We show that if property insecurity leads to technological backwardness (through strategic non-adoption of costlessly available superior technologies), a tax-funded public security that thwarts appropriation (much like a security-guard) can successfully support superior technology adoption by strategic agents in a subgame-perfect Nash equilibrium. The superior technology equilibrium might even be welfare improving over the technological backwardness equilibrium if the available technology spectrum is sufficiently wide. We then study-within the confines of superior technology adoption-whether more secure property is always welfare improving for everyone. We find that better property security-although growth-enhancing-might not be welfare improving for all. Indeed, it is possible that the poor are made worse-off as a consequence of reallocation of resources in response to enhanced property security and not because public authorities are corruptible. In such a situation, we design a budget-balanced tax-linked-transfer scheme where the poor is given a tax-relief at the expense of an additional tax burden on the rich agent. We show that for a below thirty percent tax relief to the poor, a Pareto-improving movement towards property security can be achieved.