The tyranny of inequality

When parties are very unequally endowed, agreement may be very difficult to reach, even if the specific transaction is easy to contract on, and fungib le resources can be transferred to compensate the losing party. The very fu ngibility of the resource transferred makes it hard to restrict its use, ch anging the amount the parties involved spend in trying to grab future rents . This spill-over effect can inhibit otherwise valuable transactions, as we ll as enable otherwise inefficient transactions. Agreement typically breaks down when the required transfer is large and the proposed recipient of the transfer is relatively unproductive or poorly endowed. We examine the impl ications of this model for a theory of the optimal allocation of property r ights. (C) 2000 Elsevier Science S.A. All rights reserved.