Resistance, Redistribution and Investor-friendliness∗

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 affected groups value surplus, which helps the government in implementing the optimal redistribution policy. Destruction is increasing in the extent of political marginalization of the affected group. While resistance has informational value, it has two distinct costs: it directly reduces surplus and also reduces 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 conditions under which the government should ban resistance or should allow resistance but compensate the investor for its losses incurred in order to enhance social welfare.