Lecture 18

Property Rights – Comparative Analysis

The philosophy of property

• Property is theft (Proudhon 1840)

• Property is freedom

• Property is responsibility

• Private vs. State property

Property rights

• Absolute property rights are to be respected by everybody, e.g. private land property, intellectual property rights, human rights

• Relative property rights are related to specific creditor-obligator relationships, e.g. parties to a sales contract or a labor contract

• Other property rights in the sense of relationships that are not protected by law, e.g. friendship, customer relationship

Absolute property rights

• Unrestricted property rights to things

• Restricted property rights to things– Constraint use rights

– Security-interest, exploitation rights

– Pre-emption rights

• Intangible property rights– Copy rights, brand names, patents

• Human rights

Relative property rights

• Rights that are established between specific persons

• Contractual obligations– Rental contract, labor contract, borrowing contract– Contract of association

• Liability claims– Contract law– Tort law (Law of accidents, neighborhood law)

Other property rights - relationships

• Friendship, partnership, family

• „relational contracts“

„ higher quality social relations are not normally available in exchange for money. The give and take of commitments are central t the existence of the informal system. Relations such as trust, loyalty, and honesty cannot be bought. Trade of these goods on open markets is technically impossible or simply unimaginable despite the fact that “they are goods…”“ Furubotn und Richter 2000, p. 84.

• Social Capital (Coleman 1990)

Absolute property rights - ownership

• The institution of ownership usually consists of the following rights

– Right to use (usus)– Right to appropriate the returns (usus fructus) – Right to change form, substance or location (abusus)– Right to transfer part or all of the rights

– Right to exclude

– Right is limited by the rights of others (tort law)

Rights and Positions

Ownership and incentives• Private ownership create incentives for investments, innovations,

and work efforts since it protects against expropriation by others

• Transferable ownership of productive resources lead to investments that maximizes the current value of the resource

• Transferability of ownership disconnect the investment from the time horizon of the investor

• Example of the effects of limited transferability: labor managed firms in Yugoslavia

Property rights and externalities

• External effect: The utility of one person is affected by the production or consumption activities of another person (positive or negative)

Conflicts emerge always if the property rights are not well defined or if the transfer of property rights is very costly

„If A beliefs he has a right to smoke and B beliefs he has a right to clean air, we have difficulties. The practical problems with externalities generally arise because of poorly defined property rights “ (Varian 1987, S. 546)

The Coase Theorem

• If transaction costs are zero, the distribution of private property rights is irrelevant for economic efficiency since negotiations between the parties will always result in the same Pareto-efficient level of the externality

Normative conclusion: What matters is that private property rights are assigned not how they are assigned

• Preconditions– No transaction costs– Well defined property rights– No „Income Effects“

Example 1: Smoking

• Two people are sitting in a room: A is smoker, B is non-smoker• Smoking causes for A a benefit of 5 EUR, but for B a harm of 6

EUR. The social optimum, therefore is Non-Smoking.

(1) A has the right to smoke. B negotiates with A and offers 5 EUR if A doesn‘t smoke. A accepts and doesn't smoke.

(2) B has the right to clean air. A negotiates with B and offers B 5 EUR if he is allowed to smoke. B refuses and A doesn’t smoke.

• In both cases A doesn’t smoke! The allocation is the same.• However, the cases have very different distributional impacts. (1) A

has a net utility of 5 EUR, B of 1 EUR. (2) A has a net utility of -0 EUR and B a net utility of 6 EUR

Example 2: Nitrate

• Farmer use fertilizer to increase their yields, simultaneously they pollute the groundwater with nitrate

• Water companies face increasing costs to clean the groundwater from nitrate to produce drinking water

Who has the property rights? How do they handle the problem?

Germany: since ground water is state property it could be expected that farmer have to pay to pollute the groundwater

But this solution has unacceptable distributional effects: state compensates farmer for constraining the use of fertilizers

The Income Effect of Property Rights Allocation

Source: Vatn (2005, p. 215)

The Transaction Cost Effect of Property Rights Allocation

Source: Vatn (2005, p. 215)

Positive transaction costs and property rights

• Positive transaction costs imply that the allocation of property rights effects resource allocation and income distribution

• Positive transaction costs imply that external effects may not be internalized privately and other institutions may be required (e.g. governmental regulation)

• Positive transaction costs imply as well that private property rights may be too costly to be specified and that other forms of ownership may be more efficient

The costs and benefits of different ownership types must be evaluated

Types of Property-Rights Regimes (Hanna

et al. 1996)

Regime type Owner Owner rights Owner duties

Private property Individual Socially acceptable uses, control of assets

Avoidance of socially unacceptable uses

Common property

Collective Exclusion of non-owners

Maintenance, constrain rate of use

State property Citizens Determine rules Maintain social objectives

Open access None Capture None

Classification of Property-Rights Regimes (Challen 2000)

The tradgedy of the commons (Hardin 1968)

MVAV

MC

A B Resource use

A – Private property

B – Open access

MV-Marginal ValueAV-Average ValueMC-Marginal Costs

Institutional solutions for the tragedy

• Privatization, exclusive private ownership (exclusion costs, specification costs, monitoring and enforcement costs etc.)

• Restricted and well defined community use, common property, state property (exclusion costs, specification costs, monitoring and enforcement costs)

Balancing the costs and benefits of different types of property rights

• „Generations of Swiss and Japanese villagers (for example) have learned the relative benefits and costs pf private-property and communal property institutions related to the various types of land and uses of land. The villagers in both settings have chosen to retain the institution of communal property as the foundation for land use and similar important aspects of village economy.“ (Ostrom 1990, S. 61)

Private property

• Private property create strong incentives for investments, innovation and efforts

but

• Costs of specification and exclusion (distributional conflicts)

• Costs of monitoring and enforcement• Costs of transferring private rights

Common property

• Lower exclusion and specification costs

But

• Reduced incentives for investments, innovations and efforts

• Costs of designing and managing use rights• Costs for monitoring and enforcement

State property

• Low specification and exclusion costs

but

• Low incentives for investments, innovation and work efforts

• Cost for designing and managing use rights

• Cost of monitoring and enforcement

Open Access

• No specification and exclusion costs• No monitoring and enforcement costs

but

• No incentives for investments, innovation and work efforts

• Losses due to resource overuse or destruction

Typology of goods(Ostrom 1990)

Private good Common pool resource

Club good Public good

Excludable Non-Excludable

Rivalry

Non-Rivalry

Characterization of resources or goods (Vatn 2005)

Transaction costs of property regimes

Transaction costUtility Losses

technical non-excludability

Private property

State property

Common property

Land Productivity and Property Regimes (Vatn 2005)

Multiple layers of property rights regimes (Challen 2000)

Lecture 7

Evolution and Change of Property Rights in Nature

Emergence of property rightsDriving force

• Economic efficiency– Allocative efficiency, social welfare– Transaction costs

• Power and Distribution– Powerful groups enforce property rights– Distributional gains are important

Mechanism and actors• Imposed by the power powerful actors, often the state• „invisible hand“ – through the interaction of many individuals on the „market“ for property rights• Bargaining - Negotiated between most important actors, e.g. state, firms, interest groups

„Invisible hand“ emergence of Property Rights (Demsetz 1967)

MC

Specification of property rights

MB

MC

MB1

MB2

MC – Marginal Costs

MB - Marginal Benefits

Demsetz (1967):Towards a Theory of Property Rights

• „...property rights develop to internalize externalities when the gains of internalization become greater then the cost of internalization.“ (S. 350)

• Example• „Before fur trade became established, hunting was carried out on primarily for

purposes of food and the relatively few furs that were required for the hunter‘s family. The externality was clearly present. ... But these externality effects were of such small significance that it did not pay for anyone to take them into account. There did not exist anything resembling private ownership in land“ (S. 351-52)

• „The lands of the Labrador Peninsula shelter forest animals whose habits are considerably different from those of the plains. Forest animals confine their territories to relatively small areas, so that the costs of internalizing the efforts of husbanding these animals is considerably reduced. This reduced cost, together with higher commercial value of fur-bearing forest animals, made it productive to establish private hunting lands.“ (p. 353)

The First Possession (Lueck 2003)

The Race for Property Rights(Lueck 2003)

The Race for Property Rights II(Anderson and Hill 2003)

Enforcing New Property Rights (Anderson and Hill 2003)

Contracting for property rights (Libecap 1989)

• Property rights emerge through negotiations between different claimants (policy makers, bureaucracy, farmer, consumer, water companies etc.)

• “Primary motivations for contracting for property rights are the aggregate losses of common pool conditions. A share of the expected gains fro mitigating those losses encourage individuals to bargain, to establish or modify property rights to limit access and to control resource use. (Libecap 1989, 9)

• „The intensity of political bargains over distributional issues and the likelihood of successful property rights change will be influenced by i) the size of the aggregated expected gains from institutional change; ii), iii) the number and heterogeneity of the bargaining parties; iv) the skewness of the current and the proposed share distribution, and v) information problems. (Libecap 1989, S. 11)

Bargaining and Distribution

• „... Institutional change to promote rational resource use and economic growth cannot be taken for granted..

• Presumably, the distributional conflicts that are inherent in any property-rights arrangement can override efficiency considerations and act to block or critically constrain the institutional structure that can be adopted.

• And, because such “bargaining” limitations, institutional change at any time is likely to produce only modest gains over the status quo.

• Insofar as this interpretation is correct, it follows that more attention must be directed to the distributional implications of property rights arrangements.

• What has to be known in any given application of internalization theory is more information on the identities and preferences of the various bargaining parties.“ (Furubotn and Richter 2000, p. 113)

Literature

• Demsetz, Harold (1967). Toward a Theory of Property Rights. American Economic Review 57, 347-359.

• Libecap, Garry (1989). Contracting for Property Rights. Cambridge: Cambridge University Press.

• Ostrom, Elinor (1990). Governing the Commons. Cambridge: Cambridge University Press.

• Barzel, Yoram (1997). Economic Analysis of Property Rights. Cambridge: Cambridge University Press, second edition.

• Anderson, Terry and Fred McChesney (2003). Property Rights. Cooperation, Conflict and Law. Princeton: Princeton University Press.