Property Rights
Basic Concepts
What is a Right?
• A right may legally or morally shield an aspect
of a person’s wellbeing (interest theory)
• Or guarantee the enjoyment of opportunity
over choices (will theory)
– Kramer et al 1998
• It may guarantee the opportunity to perform
types of actions even if a particular action is
rendered impossible.
– Dowding/van Hees, 2003
When Does a Right Exist?
• A moral right may exist whether respected or
not
• A legal right exists precisely when it is
respected
– and enforceable (by a government agency)
• what about socially accepted or factual rights?
• what about alternative arrangements?
What is a Property Right?
• Enforceable authority which gives
• Right of access, withdrawal, management,
exclusion and alienation (i.e. transfer)
– Acemoglu/Johnson distinguish between property
rights institutions (protection against political
expropriation) and contracting institutions.
• A property right may be individually or jointly
(common property) owned
– see Ostrom/Hess 2010
“Alternative” Arrangements
• Enforcement by violence has the same
function as enforcement by the state (Varese,
2001, Dixit, 2004, Gans-Morse, 2017a,b)
• Which factors determines which arrangement
is chosen?
– Supply side: How effective are state institutions?
– Demand side: cultural context,
perceptions/expectations, effectiveness of
alternative arrangements
Property Rights in a Transition Context
• Heller (1998): Moscow Storefront Rights
–
–
–
–
–
–
Right to sell
Right to receive sale revenue
Right to lease
Right to receive lease revenue
Right to determine use
Right to occupy
• Overcoming problem of the anti-commons
– Unifying fragmented property rights into usable
bundles
Common property rights
• Condominiums
– Who has responsibility for exterior (i.e. façade) or
jointly used facilities (elevator)
• In the west: Home Owner Associations (HOA)
– established by construction company
– voting rule often 67%, some decision (such as
dissolving HOA) 80%
• protection against exploitation by majority
– association dues often by m2
Common property rights in transition
countries
• Kazakhstan
– by law, condominium needs to be run by HOA
(kooperativa) or management company
– some decisions with qualified majority or
unanimity of members
– in inflationary environment, increase of
association dues is necessary but often infeasible
Conclusion on property rights in
transition
• Property rights are sometimes not effectively
bundled
• Common property rights are often neglected
• Even where they are well-defined, they are
operated under in an environment where it is
difficult to exercise them
Why are Property Rights
Important?
Property Rights
• Modern notion emerged from feudalism as
real property becomes marketable
– extending to licencing and patents
• Justified by conservatism or as a means to
achieve particular ends such as efficiency,
distributive justice or liberty
– (Ulen-Cooter, chpt 4)
The Efficiency Case
• Property rights give the right to appropriate fruits of
investment and innovation
• Assume these rights are “inclusive”
– equally attainable for everyone
– compatible with competition (i.e. they do not prevent
“creative destruction”)
•  they explain the difference between successful
(innovating) societies and failing nations
– Acemoglu/Robinson, Why Nations Fail, 2012.
– compare: “impersonal and efficient” property rights
(North/Thomas)
The Law & Economics View on
Property Rights
• Guarantors of Economic Efficiency
• Internalizing externalities
• Coase Theorem: If property rights are
unambiguously assigned and bargaining is
costless, an efficient outcome is obtained
• Efficient here means: Pareto-optimal
– more generally, efficiency in the L&E sense means
a solution which maximizes the sum of social
benefits minus social costs
Law & Economics View on Property
Rights
• The property rights institution where property
rights are defended by the state is in itself
“efficient” (in the L&E sense) if the state can
more cheaply defend property rights than the
owners.
• Consequence: Property rights are not established
where it is too costly to police (or exploit) them
(Barzel 1989).
– Example: Slavery
– “evolutionary approach” to institutions
Evolutionary Approach to Institutions
• Do legal systems evolve such as to ensure
efficiency (Posner, 1972)?
• or is an innate claim of ownership “hardwired” into our psyche because it is
evolutionary advantageous (Eswaran/Neary,
2014)?
Rejection of the Law & Economics
View on Property Rights
• Acemoglu (2003): Commitment problem
• The politically disadvantaged cannot promise
the elite to transfer resources once their
disadvantage has been removed
• and the ruler cannot easily promise their
citizens to go untaxed after citizens made an
investment
• punishing the ruler (trigger strategies) may
support solution but not necessarily first best
Questions to Ask about Efficiency of
Institutions
• Centralism vs Federalism
• But in western history, putting constitutional
constraints on a centralized state was the way
to success (Acemoglu/Robinson, 2012)
Institutional Development in History
• Do decentralized systems produce more
protection?
– Poland 14th century (Hartwell, 2016), England, 12th
century
– but: 19th century Germany, Italy?
– demand for protection versus oligarchic fiefdoms
• In the west, property rights had to be wrested
from absolutist rulers
Property Rights and Investment
Property rights and investment
• In the following we only discuss relationship
between FDI and government promise not to
expropriate
• Applies similarly to domestic investment
The FDI expropriation problem
• The FDI expropriation problem (Thomas/Worrall,
1994)
– Government wants to maximize revenue from taxing
FDI
– Firm and government are infinitely lived
– Firm needs to undertake recurring investments
– At any point, incentive to “renege” the contract:
• the government would like to promise no tax on capital to
attract more but once the capital is installed, it wants to
expropriate all (and promise not to expropriate in the future)
The capital levy problem and FDI
• Assume the firm responds to reneging the
contract by reverting to autarky (i.e. it does
not invest in the future)
– Then there is a “self-enforcing” contract which the
government does not want to renege because the
gain from reneging is less than its future losses
– But the equilibrium level of capital may be below
efficient level
• See a simplified model with those features
“Nice” Equilibrium Supported by
Trigger-Strategies
Company invests k with production function f(k). Investment
earns its opportunity cost i and a rent r(k) above its
opportunity cost i. If the government seizes the project,
it has to forego any rent but can earn a scrap value k.
f'
r (k * )
i
k
k
*
Credible Level k0
Government agrees that company pays a transfer (royalty) t0.
The participation constraint of the company requires that
t  r (k )
0
0
With discount rate , the government prefers continuation
over realization of the scrap value as long as
1 0
t  k0
1 
which is feasible if
1
r (k 0 )  k 0
1 
Credible Level k0
The efficient level is supported, i.e. k0 = k*, if
1
r (k * )  k *
1 
If  and r are small, this inequality is violated. In this case,
because r(k)/k decreases in k, inefficiently small k0 is supported:
k 0  k*
What Are the Crucial Features
• For underinvestment result?
– Some advantage to the company in investing
– Sufficiently strong desire for instant gratification
(scrap value/discount rate)
• Without advantage from trading with the
company, immediate expropriation would
occur
• Without instant gratification motive, the
efficient capital level could be supported
Conclusion and Extension
• So the model is compatible with the
observation that even governments which
cannot commit will see some FDI
• But FDI will be inefficiently small
• Variant (Guriev/Kotolin/Sonin 2011)
– Firm faces uncertainty over oil-price
– if the oil price is low, it receives return
– if the oil price is high, the government
expropriates
Empirical Relationship between
Property Rights and Growth
• Acemoglu/Johnson (QJR 2005):
• Outcome = f(property rights institution,
contracting institution, controls)
• Problem: potential endogeneity, so first stage:
– property rights institution = g(settler mortality,
controls)
– contracting institution = h(legal origin, controls)
Acemoglu/Johnson 2005
Appendix: The capital levy
problem (a la Acemoglu 2003)
The capital levy problem (Acemoglu)
• Citizens invest, next the ruler sets the tax
• If there is a last period T, citizens expect that
they are expropriated in the last period
• So citizens do not invest in T-1 and ruler
expropriates any capital in T.
• By induction for all period t<T.
• This single-shot Nash equilibrium is also a
Nash equilibrium of the infinite horizon game.
The capital levy problem (Acemoglu)
• The equilibrium is inefficient: If ruler promises
citizens a zero tax regime (= first best), citizens
could offer a side payment.
– but requires commitment
• Assume that the maximum credible side payment
is Tmax or citizens switch to non market activity
• “Credible”, “incentive compatible” or “selfenforcing” tax policy can be supported with
trigger-strategies
– If ruler deviates, citizens play single shot NE forever.
– depending on discount rate
Trigger-equilibrium
Capital tax rate is  = 0 as long as citizens make side payment of
Tmax and invest the efficient amount emax=1. If government
imposes a positive capital tax, citizens switch to zero
investment and non market activities offering zero tax or transfer.
The policy is self-enforcing as long as
1
T max  e max (  0)
1 
where  is the one-period discount factor.
More likely to be fulfilled as  is small and Tmax is large.
Revenue
Short term revenue = output max
If maximal acceptable transfer
and/or discount rate is small,
first best output e=1 is not
supported in self-enforcing
equilibrium
 1
D
discounted long run transfer
Tmax

1
1
1 
E
 0  100%
0

0
slope = 
output
e 1
Maximal acceptable transfer Tmax
e