Wealth Inequality and Collective Action (original) (raw)

We analyze the e¤ect of inequality in the distribution of endowment of a private input (brie ‡y, wealth) that is complementary in production with a collective input on e¢ ciency. The collective input is the outcome of a collective action problem (e.g., contribution to pure or impure public goods and extraction from common-property resources). In an environment where transactions costs prevent the e¢ cient allocation of the private input across individuals, and the collective action problem is resolved in a decentralized manner, we characterize the optimal second-best distribution of wealth. We show that while e¢ ciency increases with greater equality within the group of contributors and non-contributors, in some situations there is an optimal degree of inequality between the groups, thereby locating Olson's original insight in a more general framework.