Appropriability, institutions, and welfare in a Tullock contest

Abstract

We model institutional development through Tullock contests. We define appropriability in terms of the extent to which high effort can enable agents to acquire control of the resource in the contest. At low appropriability, all agents share the resource equitably at the Nash equilibrium. Hence, institutions are inclusive and have a high aggregate payoff and equality. Social welfare is high. However, with high appropriability, the strongest agents exclude others from the resource. Institutions are then exclusive. Excessive rent seeking by the strongest agents reduces payoffs but increases inequality. Social welfare is low. We also establish the robustness of the Nash equilibrium under the best response dynamic.