2 In order to make the main point, we have presented a simpli"ed model that ignores general
equilibrium e!ects. Assuming a is exogenous, the expected return for an outside investor varies
between countries that have a di!erent value of k. In equilibrium this would not occur because
outside investors would want to invest more in the country with a higher return. A complete model
would include these general equilibrium e!ects.
3 Di!erentiating absolute responsiveness with respect to k gives:
Lo!
/Lk"L2P/LRLk"(!LS/Lk)#[!R(L2S/LRLk)].
The "rst term is always negative: a higher value of k increases the absolute level of stealing. But the
second term is positive } when k is higher, a given change in R induces a smaller change in the level of
stealing (due to the convex stealing costs). When the second term is relatively large in absolute terms,
i.e., when R is high, then L2P/LRLk will be positive.