The Role Of Property Rights In Economic Growth Outline

THE ROLE OF PROPERTY RIGHTS IN ECONOMIC GROWTH

1. Howard Demsetz—Theory on Property Rights

   1. Property rights arise when the benefits of internalization exceed its costs(policing)—Montagne Indians first started claiming individual rights to hunting grounds by blazing trees with their crest in response to European fur trade, which made benefits of internalization high. Increase in beaver fur price had led to overhuntingindividual rights to hunting in certain areas.

   2. Private ownership reduces, but does not eliminate, transaction costs (easier to negotiate with one person than with 1000 over land use)

   3. Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner’s private rights

   4. One primary function of property rights it to guide incentives (tragedy of commons, tradable fishery quotas)

   5. Demsetz three conditions (which are never really met)

      1. All property rights are assigned

      2. No transaction costs of

         1. Trading

         2. Enforcing / policing

      3. Everyone is rational utility maximizer. Only works if you can monetize everything and include everything on utility curve.

      4. Changes in the distribution of wealth do not affect demand patterns.

2. Development / Economic Growth Theorists

   1. Knack and Keefer—security of property rights and efficiency w/ which govt manages the provisions of public goods are significant determinants of the rate at which an economy grows; institutions that protect property rights are indispensible to investment

   2. Shihata (World Bank on essential elements of governance)—Certain conditions are needed for a stable business environment and stable modern state. Stability and predictability are essential to the success of investment

      1. Set of rules which are known in advance

      2. Rules actually enforced

      3. Procedures to allow for departure from rules or amendment of rules when necessary

      4. Conflicts in application resolved by binding decisions of independent arbitral body

      5. BUT PROF: Maybe stability is not what we’re after. Economic growth almost inherently requires INstability. But we do want some predictability and some semblance of fairness and process (even if just through the Communist party in China) for destroying property rights when its in the interests of economic growth.

   3. De Soto—Costs of Absence of Good Law and Security of Property Rights in Informal Peru

      1. Formal economy is designed to favor the propertied classes; but informal economy not necessarily bad--might be an escape hatch from underdevelopment—

         1. System rewards not creativity or competition, but connectionsleads to inefficient use of resources, wasteful allocation to bureaucratic activities and pandering

      2. Three key elements that a system of law provide (and that informals lack): property rights, contracts, and extracontractual legal system

      3. Informals don’t use or preserve resources as efficiently as they might if they had rights. They don’t invest in homes b/c they can’t rely on receiving the benefits of investment. Reduction in aggregate investment

      4. Informals cant transfer property easily, cannot use it for collateral or transfer it to higher-value uses. Less mobility of capitallower productivity.

      5. Informals incur substantial costs in defending their possession and satisfying the need for public property by establishing and operating thousands of different organizations.

         1. Informals lack administrative and levying mechanism to develop and pay for collective projects lie roads and sewer systems. A sovereign could just tax and spendinformals invest in movables like TV’s rather than roads.

3. Distinction between tort and property rights

   1. In Tort (nuisance) you get damages. Often the case with nuisance

   2. In property, you get an injunction. Sanderson would’ve had right to injunction against coal company if the court hadn’t changed the doctrine.

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