Exchange Efficiency with Weak Ownership Rights

Bar‐Gill, Oren; Persico, Nicola

doi:10.1257/mic.20140232

“…The present study is strictly related to several strands of literature. First, a legacy of recent contributions shows that weak property rights can be optimal in an endowment economy (Jordan, 2006;Bar-Gill and Persico, 2016;Segal and Whinston, 2016;Arruñada, Zanarone, and Garoupa, 2017). Not only do I extend this result to production economies by clarifying how weak property rights can curb market frictions and partially solve market failures, 4 but I also highlight the relationships between the latter and either the dispersion in the traders' valuations or the likelihood of a more productive technology.…”

Section: Introductionmentioning

confidence: 81%

Property Rights, Transaction Costs, and the Limits of the Market

Guerriero¹

2018

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Although the relevance of property rights and transaction costs for trade and innovation are well-known, we still lack a formal framework to think about their origins and interplay. Within trade interactions, fully protecting the original owners' property implies that some high-valuation potential buyers inefficiently refuse to buy it because of transaction costs. When instead property rights are weak, low-valuation potential buyers inefficiently expropriate the original owners' property. The trade-off between these two misallocations entails that property rights will be weaker the larger transaction costs are regardless of whether they are driven by frictions outside the control of traders or determined by the mix of the dispersion in their valuation and either the original owners' market power or their privileged information. A similar conclusion holds true for an upstream firm's property rights on an input necessary to a downstream firm to introduce a new technology and whose cost is random and ex ante non contractible. This time, transaction costs rise with the likelihood of a more productive technology. All these implications survive when a group of traders/innovators has a larger political influence on institutional design and when the disincentive to effort effect of weak property rights is taken into account. Crucially, the model predictions are consistent with the negative effects of proxies for market frictions and failures on measures of the protection of personal, intellectual, and financial property for a panel of 135 countries spanning the 2006-2015 period. Evidence from several identification strategies suggests that these relationships are indeed causal.

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“…First, a legacy of recent contributions shows that weak property rights can be optimal in an endowment economy (Jordan, 2006;Bar-Gill and Persico, 2016;Segal and Whinston, 2016;Arruñada, Zanarone, and Garoupa, 2017). Not only do I extend this result to production economies by clarifying how weak property rights can curb market frictions and partially solve market failures, 4 but I also highlight the relationships between the latter and either the dispersion in the traders' valuations or the likelihood of a more productive technology.…”

Section: Introductionmentioning

confidence: 81%

Property Rights, Transaction Costs, and the Limits of the Market.

Guerriero

¹

2017

SSRN Journal

2

0

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Although the relevance of property rights and transaction costs for trade and innovation are well-known, we still lack a formal framework to think about their origins and interplay. Within trade interactions, fully protecting the original owners' property implies that some high-valuation potential buyers inefficiently refuse to buy it because of transaction costs. When instead property rights are weak, low-valuation potential buyers inefficiently expropriate the original owners' property. The trade-off between these two misallocations entails that property rights will be weaker the larger transaction costs are regardless of whether they are driven by frictions outside the control of traders or determined by the mix of the dispersion in their valuation and either the original owners' market power or their privileged information. A similar conclusion holds true for an upstream firm's property rights on an input necessary to a downstream firm to introduce a new technology and whose cost is random and ex ante non contractible. This time, transaction costs rise with the likelihood of a more productive technology. All these implications survive when a group of traders/innovators has a larger political influence on institutional design and when the disincentive to effort effect of weak property rights is taken into account. Crucially, the model predictions are consistent with the negative effects of proxies for market frictions and failures on measures of the protection of personal, intellectual, and financial property for a panel of 135 countries spanning the 2006-2015 period. Evidence from several identification strategies suggests that these relationships are indeed causal.

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“…Should an entitlement be protected with a strong property rule or rather with a weaker liability rule? A large literature in law and economics has studied this question; and the debate rages on (see Calabresi and Melamed 1972, Kaplow and Shavell 1996, Bebchuk 2001, Ayres 2005, Bar-Gill and Bebchuk 2010, Bar-Gill and Persico 2016, Bar-Gill and Persico 2019. One important critique of liability rules, especially when the cost of taking is small, is that a lowvaluation party might inefficiently take from a high-valuation party.…”

Section: Introductionmentioning

confidence: 99%

“…Why incur a taking cost, if you don't expect to keep the asset? Sequential takings have been studied in the theoretical literature (see Calabresi and Melamed 1972, Kaplow and Shavell 1996, Bebchuk 2001, Ayres 2005, Bar-Gill and Bebchuk 2010, Bar-Gill and Persico 2016, Bar-Gill and Persico 2019. In this paper, we use an experiment to assess the ability of sequential takings to secure efficiency.…”

Section: Introductionmentioning

confidence: 99%

Property is Dummy Proof: An Experiment

Bar‐Gill¹,

Engel

²

2020

SSRN Journal

Self Cite

0

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Law is for humans. Humans suffer from cognitive limitations. Legal institutions can help humans by making these limitations irrelevant. This experiment shows that strong property rights serve this function. In theory, efficient outcomes obtain even without strong property rights. In a hypothetical world where cognitive ability is perfect, individuals would not engage in wasteful taking wars. A party would not take another's good, if she expects that the good will ultimately be taken back. By contrast, the large majority of experimental subjects takes a token good when interacting with a computer they know to maximize profit, and that has a symmetric ability to take the good back. Experience mitigates the inefficiency, but does not eliminate it; and in the real world relevant experience is often lacking. We show that cognitive limitations prevent weak property rights-imperfectly enforced property rules and liability rules with low damages-from securing efficient outcomes. Strong property rights should be preferred, because they are dummy proof.

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Exchange Efficiency with Weak Ownership Rights

Cited by 14 publications

References 18 publications

Property Rights, Transaction Costs, and the Limits of the Market

Property Rights, Transaction Costs, and the Limits of the Market

Property Rights, Transaction Costs, and the Limits of the Market.

Property is Dummy Proof: An Experiment

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