Good Fences Make Good Neighbors: Endogenous Property Rights in a Game of Conflict∗

This paper derives the conditions under which property rights can arise in an anarchy equilibrium. The creation of property rights requires that players devote part of their endowment to the public good. In the Nash equilibrium, no player contributes to the provision of property rights protection. Therefore, players are left with two alternatives. A king who provides property rights protection paid for by a tax on endowments completely eliminates conflict. However, a king who can eliminate conflict can also take the surplus for himself. As a despotic king inefficiently taxes endowments, players have an incentive to find a solution that keeps power in their own hands. Thus in a social contract, players first credibly commit part of their endowments to providing property rights and then allocate the balance of their endowments between production and conflict. A social contract can also drive conflict to zero. However, as the number of players rises, the private provision of property rights through a social contract results in positive levels of conflict and lower levels of aggregate welfare than under a benevolent king.