Property rights (economics)

Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used
and owned.[1] Resources can be owned by (and hence be the property of) individuals, associations or governments.[2] Property rights
can be viewed as an attribute of an economic good. This attribute has four broad components[3] and is often referred to as a bundle of
rights:[4]

1. the right to use the good

2. the right to earn income from the good
3. the right to transfer the good to others
4. the right to enforce property rights
In economics, property is usually considered to be ownership (rights to the proceeds generated by the property) and control over a
resource or good. Many economists effectively argue that property rights need to be fixed and need to portray the relationships
among other parties in order to be more effective.[5]

Contents
1 Regimes
2 The environment
3 Literature
4 Property rights approach to the theory of the firm
5 The role of property rights in economic and political development
6 See also
7 References

Regimes
Property rights to a good must be defined, their use must be monitored, and possession of rights must be enforced. The costs of
defining, monitoring, and enforcing property rights are termed transaction costs.[6][7] Depending on the level of transaction costs,
various forms of property rights institutions will develop. Each institutional form can be described by the distribution of rights.

[8]
The following list is ordered from no property rights defined to all property rights being held by individuals

Open-access property (res nullius) is not 'owned' by anyone. It is non-excludable (no one can exclude anyone else
from using it) but may berival (one person's use of it reduces the quantity available to other users). Open-access
property is not managed by anyone, and access to it is not controlled. There is no constraint on anyone using open-
access property (excluding people is either impossible or prohibitively costly). Examples of open-access property are
the upper atmosphere (navigable airspace) or ocean fisheries (navigable waterways).

Open-access property may exist because ownership has never been established, granted, by laws within a particular
country, or because no effective controls are in place, or feasible, i.e., the cost of exclusion outweighs the benefits. The
government can sometimes effectively convert open access property into private, common or public property through the
land grant process, by legislating to define public/private rights previously not granted.

Kevin Guerin, [9]

 Public property (also known as state property) is property that is owned by all, but its access and use are controlled
by the state or community. An example is a national park or a state-owned enterprise.[9]
Common property or collective property is property that is owned by a group of individuals. Access, use, and
exclusion are controlled by the joint owners. True commons can break down, but, unlike open-access property ,
common property owners have greater ability to manage conflicts through shared benefits and enforcement. [9]

Private property is both excludable and rival. Private property access, use, exclusion and management are
controlled by the private owner or a group of legal owners.

The environment
Implicit or explicit property rights can be created by regulating the environment, either through prescriptive command and control
approaches (e.g. limits on input/output/discharge quantities, specified processes/equipment, audits) or by market-based instruments
(e.g. taxes, transferable permits or quotas),[9] and more recently through cooperative, self-regulatory, post-regulatory and reflexive
law approaches.[10] See the Conservation Property Right

It has been proposed by Ronald Coase that clearly defining and assigning property rights would resolve environmental problems by
internalizing externalities and relying on incentives of private owners to conserve resources for the future. At common law nuisance
and tort law allows adjacent property holders to seek compensation when individual actions diminish the air and water quality for
adjacent landowners. Critics of this view argue that this assumes that it is possible to internalize all environmental benefits, that
owners will have perfect information, that scale economies are manageable, transaction costs are bearable, and that legal frameworks
operate efficiently.[9]

Literature
In 2013 researchers[11] produced an annotated bibliography on the property rights literature concerned with two principal outcomes:
(a) reduction in investors risk and increase in incentives to invest, and (b) improvements in household welfare; the researchers
explored the channels through which property rights affect growth and household welfare in developing countries. They found that
better protection of property rights can affect several development outcomes, including better management of natural resources.

Despite the overwhelming evidence on the economic relevance of property rights however, only recently economists have begun to
study their determinants by looking at the trade-off between the dispersed coercive power in a state of anarchy and the predation by a
central authority. To illustrate, incomplete property rights allow agents with valuation lower than that of the original owners of
economic value to inefficiently expropriate them distorting in this way their investment and effort exertion decisions. When instead,
the state is entrusted the power to protect property, it might directly expropriate private parties if not sufficiently constrained by an
efficient political process.[12] The necessity of strong protection of property for efficiency has been however criticized by a vast legal
scholarship, originated from the seminal contribution by Guido Calabresi and Douglas Melamed.[13] These authors argue that in the
face of transaction costs sufficiently sizeable to prevent consensual trade, legalized private expropriation in the form of, for instance,
liability rules can be welfare-increasing. Carmine Guerriero blends these two different strands of literature by linking property rights
protection, transaction costs, and preference heterogeneity.[14] To elaborate, when property is fully protected, some agents with
valuation higher than that of the original owners will be unable to legally acquire value because of sizable transaction costs. When the
protection of property is weak instead, low-valuation potential buyers inefficiently expropriate original owners. Hence, a rise in the
heterogeneity of the potential buyers' valuations makes inefficient expropriation by low-valuation potential buyers be more important
from a social welfare point of view than inefficient exclusion from trade and so induces stronger property rights. Crucially, this
prediction survives even after considering production and investment activities and it is consistent with a novel dataset on the rules on
the acquisition of ownership through adverse possession and on the use of government takings to transfer real property from a private
party to another private party prevailing in 126 jurisdictions. These data measure horizontal property rights and thus the extent of
protection of property from direct and indirect private takings, which are ubiquitous forms of expropriation that occur daily within
the rule of law and are thus different from predation by the state and the elites, which is much less common but has been the focus of
the economics literature. To capture preference diversity, the author uses the contemporary genetic diversity, which is a primitive
metric of the genealogical distance between populations with a common ancestor and so of the differences in characteristics
transmitted across generations, such as preferences.[15] Regression analysis reveals that the protection of the original owners'
property rights is the strongest where contemporary genetic diversity is the largest. Evidence from several different identification
strategies suggests that this relationship is indeed causal.

Property rights approach to the theory of the firm

The property rights approach to the theory of the firm based on the incomplete contracting paradigm was developed by Sanford
Grossman, Oliver Hart, and John Moore.[16][17] These authors argue that in the real world, contracts are incomplete and hence it is
impossible to contractually specify what decisions will have to be taken in any conceivable state of the world. There will be
renegotiations in the future, so parties have insufficient investment incentives (since they will only get a fraction of the investment's
return in future negotiations); i.e., there is a hold-up problem. Hence, property rights matter, because they determine who has control
over future decisions if no agreement will be reached. In other words, property rights determine the parties' future bargaining
positions (while their bargaining powers, i.e. their fractions of the renegotiation surplus, are independent of the property rights
allocation).[18] The property rights approach to the theory of the firm can thus explain pros and cons of integration in the context of
private firms. Yet, it has also been applied in various other frameworks such as public good provision and privatization.[19][20] The
property rights approach has been extended in many directions. For instance, some authors have studied different bargaining
solutions,[21][22] while other authors have studied the role of asymmetric information.
[23]

The role of property rights in economic and political development

Classical economists such as Adam Smith and Karl Mark generally recognize the importance of property rights in the process of
economic development, and modern mainstream economics agree with such a recognition.[24] A widely accepted explanation is that
well-enforced property rights provide incentives for individuals to participate in economic activities, such as investment, innovation
and trade, which lead to a more efficient market.[25] This can be exemplified by the development of property rights in Europe during
the Middle Ages.[26] During this epoch, political power was fully placed in hand of kings and hereditary monarchies, who often
abused their power to exploit producers, impose arbitrary taxes, or refuse to pay their debts. The lack of protection for property rights
provided little incentive for landowners and merchants to invest in land, physical or human capital, or technology. After the Civil War
of 1642 and the Glorious Revolution of 1688, shifts of political power away from the Stuart monarchs led to strengthening of
property rights of both land and capital owners. Consequently
, rapid economic development took place, setting the stage forIndustrial
Revolution.

Property rights are also believed to lower transaction costs by providing an efficient resolution for conflicts over scarce resources.[27]
Empirically, using historical data of former European colonies, Acemoglu, Johnson and Robinson find substantial evidence that good
.[28]
economic institutions those that provide secure property rights and equality of opportunity lead to economic prosperity

Property rights might be closely related to the evolution of political order, due to their protections of an individual's claims on
economic rents. North, Wallis and Weingast argue that the origin of property rights is to facilitate elites' rent-seeking activities.
Particularly, the legal and political systems that protect elites' claims of rent revenues form the basis of the so-called "limited assess
order," in which non-elites are denied access to political power and economic privileges.[29] In a historical study of medieval
England, for instance, North and Thomas find that the dramatic development of English land laws in the 13th century was a result of
elites' interests to exploit rent revenues from land ownership, after a sudden rise in land price in the 12th century.[30] In contrast, the
modern "open access order," which consists of a democratic political system and a free market economy, usually features widespread,
secure and impersonal property rights. Universal property rights, along with impersonal economic and political competition,
.[31]
downplay the role of rent-seeking and instead favor innovations and productive activities in a modern economy

See also
Alienation (property law) Economic system
Bundle of rights Intellectual property
Common ownership Land tenure
Commons Land titling
 Law and economics Private property
Means of production Property income
Natural and legal rights Right to property
Open-access Social ownership
Personal property State ownership
Public property Taxation as theft

References
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Economics, Second Edition (2008). "A property right is a socially enforced right to select uses of an economic good.
"
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