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We consider an economy where property rights are necessary to ensure sufficient rewards to ex ante investments. Because enforcement of property rights influences the ex post distribution of rents, there is room for corruption. We characterize the optimal organization of the society and optimal degree of property right enforcement subject to incentive constraints of the agents. We find that three frequently mentioned government failures arise quite naturally as part of the optimal mechanism; (i) rents for government employees, (ii) corruption, and (iii) misallocation of talent. Therefore, these observations are not in themselves proof of government failure. We also discover that the general equilibrium aspect of our model leads to a number of new results: there may exist a "free-lunch" such that over a certain range it is possible to simultaneously reduce corruption, misallocation of talent and increase investments; and it will often be the case that bureaucracies will impose a certain amount of self-discipline. "What distinguishes property from mere momentary possession is that property is a claim that will be enforced by society or the state, by custom or convention or law. " C. B. Macpherson [1978] "A coercive third-party is essential to constrain the parties to exchange when the contracts essential to realizing the productive potential ofmodern technology extend across time and space and involve impersonal exchange with other." D. North [1991, p. 194]. "The society... buys the amount of enforcement which it deems appropriate to the statute or rule: more will be bought if the statute serves a more valuable goal... and if a given increase in enforcement is less expensive." G. Becker and G. Stigler [1974, p. 3].