PROPERTY-RIGHTS, CORRUPTION AND THE ALLOCATION OF TALENT - A GENERAL EQUILIBRIUM APPROACH

We consider an economy where contracts are necessary to encourage inve stments. Contract enforcement requires that a fraction of the agents w ork in the public sector and do not accept bribes. We find that: (1) I t may be optimal to allow some corruption and not enforce property rig hts fully. (2) Less developed economies may choose lower levels of pro perty right enforcement and more corruption. (3) There may exist a 'fr ee-lunch' such that over a certain range it is possible simultaneously to reduce corruption, increase investment, and achieve a better alloc ation of talent.