Published in:
Journal of Development Economics 2014 109 pp.124 - 142.
DOI:10.1016/j.jdeveco.2014.02.007
Abstract:
Poor communities sometimes resist private investment and destroy economic surplus even if the government has the willingness and ability to redistribute. We interpret such acts of resistance as demands for redistribution: Destruction contains credible information about how the affected group values surplus, and such information is used by the government in implementing the optimal redistribution policy. The extent of destruction is increasing in the extent of political marginalization of the affected group. Resistance not only destroys economic surplus: It also mutes the investor's incentives to create surplus. The government uses a tax/subsidy on the investor to maximize weighted social surplus, and we show that the possibility of destruction may force the government to be too soft in its negotiations with the investor. We discuss several policy instruments that have the potential to improve welfare: These include compensation floor for the affected group, legal or financial protection for the investor and licensing fees for the investor.