3 The nature of property rights
This section discusses how to specify property rights, why they change, how private rights can evolve from Government actions, and how the community limits property rights.
Generally, property rights consist of separate and overlapping rights to possess, use and dispose of property. Not all these rights will necessarily be specified to the same degree, or allocated to the same owner (or allocated at all). In other words “It is not the resource itself which is owned; it is a bundle, or a portion, of rights to use a resource that is owned” (Alchian and Demsetz, 1973, p17).
3.1 Property rights in society
Which rights exist and who owns them (eg, individuals or the state) has major societal and economic implications. Rights themselves are also “the product of rules” and “all rights have complementary duties” on others to observe them (Schlager and Ostrom, 1992, p250). The concept of rights having matching duties, and only existing within a societal/legal context of rules is very important to how rights evolve.
In a more general historical context “one of the oldest themes in economics is the incompatibility of despotism and development. Economies in which security of property is lacking … should experience relative stagnation” (De Long and Shleifer, 1993, p671). Economic growth requires secure property rights. The importance of rights and the necessary supporting institutions in economic development was also demonstrated in a recent study showing that institutions far outweighed government policies and geography as an explanatory factor (Easterly and Levine, 2002). Institutions and rights, however, remain a necessary rather than sufficient factor for growth (Hausman and Rodrik, 2002)
This paper does not delve into issues of property right endowments. While the Coase Theorem suggests that the ultimate result (which maximises the value of production) is independent of the initial delimitation of rights because each right will be acquired by whoever places the highest value on it (assuming zero transaction costs) the initial allocation of rights does affect the distribution of the benefits of ownership when there are transaction costs (Coase, 1960).
- Another study looking at the effect of secure property rights on firms’ willingness to invest in intangible assets (eg, intellectual property), rather than more easily protected fixed assets, found that “improved asset allocation due to better property rights has an effect … equal to improved access to financing arising from greater financial development” (Claessens and Leaven, 2002, p1)
- Similarly in China, there were concerns that more secure land rights undermined the function of land as a social safety net. Evidence, however suggested “that greater tenure security, especially if combined with transferability of land, had a positive impact on agricultural investment” without increasing inequality of land distribution or reducing “households’ ability to cope with exogenous shocks”, and that resistance to changed property rights reduced as familiarity increased (Deininger and Jin, 2002, p1).