Chapter Four
Property Rights:
Theories And Practices
Lecture notes by Bantalem
Chapter outline
1. The concept of property rights
2. Theories of property rights
3. Property rights regimes
4. Property rights and economic performance (empirical evidence)
Property rights basic concepts
What a property
• Many people regard propertyas a tangible 'physicalobject' economists use a
different conceptual language
• Property is considered as a "benefit (or income) stream" in that the
owner controls this benefit stream (Bromley 1991)
• Something is "property“ if it has value to someoneafter costs are
considered
What is a right
• A right is a 'set of actions and behaviors that possessor of a property may
not be prevented from undertaking, or a duty on all others to refrain
cont’d…
• Therefore, rights are not relationships between the right holder and an object, but rather are relations
between the right holder and other people with respect to the object (Bromley 1991:15) .. It is
recognized and enforced
What is a property right?
• Property Rights, are the social institutions that define or delimit the range of privileges granted to
individuals to specific resources, such as parcels of land or water
• Property rights refer to the sanctioned behavioural relations among actors
that arise from the existence of physical entities and focus on the cost and
benefit streams from using them
• Effectively, property rights assignments specify the norms of behavior with
respect to these cost and benefit streams that each person must comply
with, or bear the cost for non-compliance.
Cont’d…
• Rights individuals appropriate over own labor and goods and
services they possess
• Right to exclude non-owners from access;
• Right to appropriate the stream of economic rents; and
• Includes "fruits" of labor and "fruits" from goods and services
• Includes rights to trade property
• Claims to use or control a resource that are recognized as legitimate by some entity(ies)
larger than the individual and protected through some type of social or legal sanction
• A property right is a bundle of characteristics that convey certain powers to
the owner of that right
• Property rights - legal rights to use an economic property (resource) and to
derive income and benefits from it.
Cont’d…
• Bundles of rights includes access and withdrawal, exclusion,
management and alienation rights (Schalger and Ostrom,
1992)
• Property regimes consist of two elements (1) property
regimes which govern use and transfer of rights to a resource
and (2) rules can govern the transactions concerning the
results from the resource
Property Rights Regimes
1. Private: private, individual
2. Common: as a private of a group of co-owners
3. State {public): national or local state
4. Open access: no property
Private: private, individual
• Assigns ownership to individuals-Individual or "legal
individual“ holds rights
• Guarantees those owners control of access and the right to
bundle of socially acceptable uses
• Requires owners to avoid specified uses deemed socially unacceptable
• Private ownership may lead to most efficient
resource use and management
• Private ownership must be consistent with the social norms and
traditions of the society and then they could work appropriately
Cont’d…
• When property is Private
• There is "Single" owner - natural or corporate person
• There is Complete control
• The Owner assumed to maximum long-term value of property
• Capital asset value (resale value)
• Protects against misuse
• Optimizes rate of utilization
• Income flow - make best economic use of property
Common Property Rights
• They could be defined as private rights to a group of co-owners
(Bromley 1991)
• Owned by an identified group of people
• Owner group has right to exclude non-owners (exclusivity
characteristic)
• Group (eg community) holds rights
• Can manage, exclude others
• Importance of rules to manage, distribute
• They are more appropriate if externalities or public goods are not
dominating
• They consist of access, use and control rights to the resource
Cont’d…
• Owner group has duty to maintain property through
constraints placed on use
• Often implemented for common-pool resources
• Difficult to divide or bound these resources
• Still rivalries consumption within group
• Community addresses efficient use through rules and means
• Right of control is collective rather than individual, due to absence of
complete set of contractual relations governing duties of individuals
• Membership in group limited by legally recognized and enforceable
rights
Cont’d…
■ Common property rules and resource use can break down if defined
group grows too large or there is significant technical change
■May pay any one individual to break ranks and maximize
individual utility at expense of community's overall interests
■Local commons include grazing lands, inshore
fisheries, collectively managed irrigation
systems, subterranean aquifers and oil reserves,
wildlife, some forests
Open Access
• No effective management and Access to resource use is not restricted
■ Lack of property rights or ownership
■ No exclusivity - exclusive use
■ Rivalries consumption with depletion
■ Its exploitation results in symmetric or asymmetric externalities
■ Agents have to decide whether or not they should 'enter' and start exploiting the
resource
■ Their choice is based on comparison between price of entry they have to bear
(their opportunity cost) and expected returns
Cont’d…
• Common property and open access have often been confused in the
literature
• Under common property, the right of exclusion is assigned to a well-
defined group
• Under open access, a right of inclusion is granted to anyone who
wants to use the resource
• If (1) information is perfect and (2) there are no transactions costs,
regulated common property and private property are equivalent
from the standpoint of the efficiency of resource use
• Both property regimes can support a Pareto-optimal equilibrium
State Property Rights/Public Property
• State holds rights
• Owned by citizens of political unit
• Rule-making authority assigned to public agency
Public agency has duty to ensure that rules promote social obligations
• Citizens have right to use resource within established rules
• More appropriate if externalities or public goods aspects dominate
• Combined with regulated individual use rights through concession and
licensing
• Management by state agencies or through regulations & incentives
• Global conventions & international mechanisms for global public goods
Characteristics of property rights
Efficient property right structures Generally have the following main characteristics
1. Universality: All resources or assets are privately or collectively owned and all entitlements
must be completely specified and effectively enforced
2. Exclusivity : All benefits and costs from use of a resource accrue to the owner
• Holder, whether individual or group, has exclusive use, and doesn't have to share the
resource with others
• Applies to resources owned in common or privately by individuals (including firms)
• Durability is an important feature of exclusivity
• Duration of a property right - durability -- is the length of the entitlement
• Length of entitlement can range from renting (shortest) to leasing (longer) to
ownership (longest)
Cont’d
3. Transferability: All property rights should be transferable from
one owner to another in voluntary exchange
Transferability provides the owner with an incentive to conserve an
resource beyond the time the owner is expected to use it
• Allows arbitrage efficiency or gains from trade
• Divisibility is an important feature of transferability
• Divisibility facilitates transferability
Cont’d…
4. Security : Property rights should be secure from involuntary seizure or
encroachment by other individuals, firms, or governments
•Owner has incentive to improve and preserve a resource while under his/her
control rather than exploit the assets
• If the owner cannot enforce exclusivity, then cannot enjoy all benefits and
rights
• One’s property rights to a particular benefit stream are rarely absolute
• From the perspective of the right holder, key attributes of property
rights are assurance, duration and breadth
Cont’d…
• Assurance: probability of enjoying the same right in a future
period
• Duration: length of time period of right
• Tenure defined the distribution, assurance, breadth and
duration of rights and duties to resources/ property
Theories
• Libecap (1989): Contracting for Property Rights
• North (1990): Institutions, Institutional Change and
Economic Performance
• Barzel (1989):Economic Analysis of Property Rights
• Eggertsson (1990): Economic Behavior and Organization
• Hart (995): Firms, Contracts and Financial Structure
Libecap
• Property rights provide the basic economic
incentive system that shapes resource allocation
• Libecap (1989) maintains that property rights are formed and
enforced by political entities, and that property rights reflect
the conflicting economic interests and bargaining strengths of
those affected.
• He defined Property Rights, as the social institutions that
define or delimit the range of privileges granted to individuals
to specific resources, such as parcels of land or water
Libecap
• Property rights institutions range from formal arrangements, including
constitutional provisions, statutes, and judicial rulings, to informal
conventions and customs regarding the allocations and uses of property
• Such property rights institutions critically affect decision making
regarding resource use and, hence, affect economic behavior and
economic performance
• Pressures to change existing property rights can emerge from the
following factors:
• Shifts in relative prices;
• Changes in production and enforcement technology; and
• Shifts in preferences and other political parameters
Libecap
• All else being equal, the greater the size of the anticipated
economic benefits of institutional change (the greater the
economic losses of the common pool), the more likely new
property rights will be sought and adopted because it is more
likely that a politically acceptable share arrangement can be
devised by politicians to make enough influential parties better
off so that institutional change can proceed
North (1990)
• North (1990) abandons the efficiency view of institutions, which he himself
promoted in the 1970s, and maintains that rulers devise property rights in
their own economic interests and that positive transaction costs result in
the persistence of inefficient property rights
• As a result, it is possible to provide an account for the widespread existence of
property rights throughout history (and in the present) that did not produce
economic growth
• The contrast between the neoclassical assumptions about the evolution of
property rights evolving toward efficiency and the performance of economies
(however defined and measured) is surprising
• The forcible power of the state has been employed throughout most of history in
ways that have blockaded economic growth
North (1990)
• The inability of societies to develop effective, low-cost enforcement of contracts
is the most important source of both historical stagnation and contemporary
underdevelopment in the third world
• Enforcement in the third world economies is uncertain not only because of
ambiguity of legal doctrine (a measurement cost) but also because of
uncertainty with respect to the behavior of the judicial system
• Property rights and economic incentives are the underlying determinants of
economic performance
• One gets efficient institutions by a polity that has built-in economic incentives to
create and enforce efficient property rights
• Path dependence is the key to an analytical understanding of long-run change in
property rights
Eggertsson (1990):
• Property rights to a resource are often partitioned
• For example, in the case of land, person A and person C may
possess the right to dump ashes on the land, person A and
person B may possess the right to grow wheat on the land
Person C may possess the right to dump ashes on the land
Person D may possess the right to fly an airplane over the
land And each of these rights may be transferable
• In sum, private property rights to various partitioned
uses of land are "owned" by different persons
The Coase Theorem
• Initial Assumption of Coase: Production and exchange can be solely carried
out through the price mechanism
• (However) In the process of determining price rate, there is a cost of
discovering prices (Cheung 1983)
• The idea that Perfect markets direct all production in the absence of
transaction costs (zero) is a fiction, leading to the Coase Theorem
• In the absence of transaction costs, the most efficient solution to maximize
aggregate income will be obtained irrespective of the original
distribution of resources of liability (the Theorem)
The Coase Theorem
• However, if transaction costs are positive, then property rights
institutions do matter. This occurs in a real world
• Later on, he introduced the notion of positive transaction cost,
which is the cost of carrying out market transactions: costs of
organization (the contribution of Coase to NIE)
• The theorem can be concluded as far as property rights be
well-defined, low transaction costs, perfect competition and
perfect market, and then resources can be used efficiently
Economic Role of Property Rights
• The more certain property rights are, the more
capital accumulation there will be
• The more certain are property rights, the more
entrepreneurship there will be
• The "West" experience growth because countries
developed secure private property rights (North and
Thomas 1973) ….remember the institutional
hypothesis of cross-countries income differences
Cont’d..
• Thinkers in the last two decades have focused on the
role of institutions in long-term economic growth, and
among them, property rights (for example, Acemoglu
et al 2001) take a lion share
• A particular focus on the role of property rights emerged
with papers from Acemoglu et al (2001-2005) singling
out the security of property rights as a predominant
determinant of income level differences
Cont’d..
• Focusing on growth over the period 1974-1989, and using the ICRG
composite index and adding it to a Barro-type growth regression,
Acemoglu et al (2001, 2002, 2005) who use a base sample of 64
countries colonized between the 15th and 19th centuries, running
simple and more complex least squares regressions of GDP per
capita in 1995 on the average protection against expropriation risk
(of private property) through institutions (measured via ICRG -
average over 1985-1995)
• On the basis of a 2SLS regression, the authors found a highly
significant impact of property rights institutions on the level of
income per capita
Cont’d
• This analysis was repeated with the "natural experiment"
of the separation of North and South Korea, countries with
shared historical and cultural roots, and similar geography but
which established very different types of property rights
regimes after their separation
• The authors noted that by 2000, the level of income per
capita in South Korea was US$16,100 while in North Korea it
was only US$1,000, about the same as a typical subSaharan
African country (Acemoglu et al 2005)
Evidence on its Impact
• Governance & admin. efficiency
• Legal change improved scope for enforcement in democratic settings in China
• Perceived threat of uncompensated expropriation reduced in Ethiopia (????)
• Land-related investment
• Doubling of likelihood of soil conservation in Uganda
• House renovations & standards in urban Peru/Argentina
• Higher level of perennials & off-farm participation in Vietnam
• More investment with high marginal returns for full title in Nicaragua
• Higher investment in Ethiopia shortly after certification
• Enforcement effort & gender equality
• Labor market participation due to less need to guard house in Peru
• Lower fertility due to female empowerment via titling
• More spending on education in Buenos Aires
Impact…..
• Land values
• Capture present value of benefit stream from land
• 23% self-assessed in Ecuador; 30% in Nicaragua, 58% in Philippines 73% in Indonesia
but only 6% in Madagascar
• Land market operation
• Tendency to rent out in Guatemala (+63% with full security)
• Higher propensity to rent out to non-relatives in Vietnam
• Land market participation by females in Ethiopia
• Use of land as collateral for credit
• Significant effects in Paraguay; only for larger producers
• Still considerable rationing in Peru (foreclosure)
• Signaling in Thailand
• No effect in Buenos Aires
• Credit-related benefits in developing countries may be overstated
