Owning versus Renting: Do Courts Matter?

Abstract

We develop a legal contract enforcement theory of the decision to own or lease. The allocation of ownership rights will minimize enforcement costs when the legal system is inefficient. In particular, when legal enforcement of contracts is costly, there will be a shift from arrangements that rely on such enforcement (such as a rental agreement) toward other forms that do not (such as direct ownership). We then test this prediction and show that costly enforcement of rental contracts hampers the development of the rental housing market in a cross section of countries. We argue that this association is not the result of reverse causation from a developed rental market to more investor protective enforcement and is not driven by alternative institutional channels. The results provide supportive evidence for the importance of legal contract enforcement for market development and the optimal allocation of property rights. (c) 2010 by The University of Chicago. All rights reserved..

The Housing Stock, Housing Prices, and User Costs: The Roles of Location, Structure, and Unobserved Quality

“…Linneman (1985) notes that the “efficiency” of landlord provided housing services is an important factor determining ownership rates. Casas‐Arce and Saiz (2010) examine how different jurisdictions' legal systems and propensities to enforce contracts affect ownership propensities. Hanson (2012) looks at how the mortgage interest tax deduction interacts with home sizes to affect ownership rates in the United States.…”

Ownership, Risk and Regulation of MFIs in Central Africa Countries

“…Except the owner's desire to be himself master, owning is better than outsourcing because of the firm internalises the market transaction costs i.e. the costs of observing and adjusting to market price mechanisms but also the costs involved by contracts incompleteness, by information asymmetry, by misalignments of contracting parties' interests and by designing equitable incentive schemes [15][16][17][18][19] namely when the legal system is perceived to inefficiently enforce contracts [20,21]. Accordingly, the various institutional arrangements have been crafted so as to benefit from economies of scale [15] and of specialisation [12,23].…”

Ownership Forms and Costs of Operations of Microfinance Institutions in Cameroon

“…MFIs ownership forms environment" (Ménard& Shirley, 2008, p.1). Except the owner's desire to be himself master, owning is better than outsourcing because the firm internalizes the market transaction costs, i.e., the costs of observing and adjusting to market price mechanisms but also the costs involved by contracts incompleteness, by information asymmetry, by misalignments of contracting parties' interests, and by designing equitable incentive schemes (Coase, 1937;Williamson, 1971;Alchian & Demsetz, 1972;Grossman & Hart, 1986;Holmstrom & Tirole, 1989) namely when the legal system is perceived to inefficiently enforce contracts (Casas-Arce & Saiz, 2006;2010). Accordingly, the various institutional arrangements have been crafted so as to benefit from economies of scale (Coase, 1937) and of specialisation (Sraffa, 1926;Fama & Jensen, 1983a).…”