Working Paper No. 03-03

Anarchy and Demand for the State in a Trade Environment
Anna Rubinchik-Pessach and Roberto M. Samaniego
January 2003

ABSTRACT

We investigate the relationship between policy formation and the level of economic activity. We posit a dynamic search environment in which opportunities for mutually beneficial trade may be hampered by theft. Agents search for potential trading partners and, if matched, optimally choose whether to attempt to trade or to steal from each other. The excludability of goods - in the form of respected property rights - is endogenously determined as a result.

We compare the equilibria of this game under anarchy to those of an identical environment in which there is a "government" in the minimal sense of an agency that protects property rights. In exchange for protection, agents pay a certain amount to enter the market. We find that agents' willingness to pay for these services - i.e., to be taxed - is increasing in potential gains from trade, and this result is robust to corruption in government.

JEL classification: H11; H41; K42; O47
Keywords: property rights; theft; gains from trade; role for government

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