3.2 Specification of property rights
There are several types of rights attached to any particular item of property. There are three such rights at the most fundamental level, the rights to use (access or withdraw resources), possess (manage and exclude from) and dispose of (alienate) property.
These rights can be combined in many different ways and broken down for a range of particular purposes. Freehold ownership of land is, after all, not the only option. The degree to which rights are specified and owned will in turn affect the incentives on rights owners for long-term management of the underlying resource.
The manner in which the rights are specified will also affect the valuation of the right.
Table 2 summarises some key types and characteristics of property rights. It is possible to delineate more categories, but those detailed here are sufficient for most purposes.
|Nature of Right||Valuation Criteria||Characteristics of Rights||Incentives for private owners to maximise long-term value are optimal when rights are|
|Use of property.||Flexibility and divisibility.||Spatial – geographic area of right.||Universal – all relevant resources privately owned & entitlements completely specified.|
|Exclusive possession of property.||Exclusivity.
|Property – whether government can modify right without compensation.
Temporal – lifetime of right.
|Exclusive – benefits and costs accrue only to owners.|
|Quality of title.||Quality – actions possessor may take.||Enforceable – secure against seizure or encroachment.|
|Disposal of property.||Transferability.||Transferability – who right can be transferred to and whether approval is required.||Transferable – rights can be freely transferred.|
Source: Valuation criteria from Scott (1988) and Scott and Coustalin (1995). Characteristics of rights from Pennings, Heuman and Meulenberg (1996)
If these characteristics are measured along a star of axes (see Figure 1 and Figure 2) then a right that maximises each characteristic and, thereby, its value, creates a large hexagon when linking the end points of each axis.
- Figure 1 – Six characteristics of efficient property rights
- Source: Scott (1988) and Scott and Coustalin (1988).
Given societal trade-offs such a perfect right is unlikely to exist. The approach does, however, allow alternative rights designs to be compared in a consistent manner, as long as each characteristic is consistently evaluated, with the total area delineated for each right reflecting its total value relative to the alternative designs. The comparison will be best for different types of interest in the same resource at the same location, but other comparisons are feasible. Such comparisons can also be represented in tabular form. Freehold and leasehold title for land are compared in Table 3, illustrating why the latter is usually sold at a lower value.
|Characteristic||Freehold title||Leasehold title|
Source: Johnson (1992)
A perfect right is unlikely to occur in practice. However the closer that a rights regime approaches to that outcome, the more efficient will be the use of the underlying resources. For a land tenure system, for example, to facilitate wealth increase requires (1) a clear definition and allocation of property rights in land, reducing the cost of establishing ownership and scope of rights, (2) a method of distributing wealth created from land (the cost-reward structure) that creates an incentive for agents to use land in its most-valued uses net of transaction costs, internalising costs and benefits, and (3) freedom and legal enforcement of contracts, especially for sale or rent (Johnson, 1972).
Communal systems tend not to satisfy these criteria except where they have developed in response to economic forces (such as a surplus of land) which still apply. Landlord-tenant systems can fail due to high contracting costs, particularly with low literacy and poorly developed legal systems or concentrated land ownership, but can be quite efficient. Owner-cultivator systems normally meet the second criterion, but to maximise incentives also requires the first, with the third important for economies of scale (Johnson, 1972).
Table 4 summarises a set of property rights and some related classes of property-rights holders. As the table illustrates, it is limiting to focus on only one aspect of property rights, or one category of rights owners. A number of alternative bundles of these rights are practicable, and may be efficient in particular circumstances. For example in terms of the coastal marine area, everyone in New Zealand is an authorised entrant for sailing purposes and an authorised user for recreational fishing, while only ITQ holders are able to take fish for commercial sale and to sell that right (ie, they have the right of alienation). Bundles may be held by individuals, communities, or the state (which normally also retains a residual right to constrain how any particular right or bundle of rights can be exercised).
|Authorised Entrant||Authorised User||Claimant||Proprietor||Owner||Individual Transferable Quota (ITQ) for fishing|
Source: Ostrom (1999) and Schlager and Ostrom (1992)
People other than freehold owners in the conventional sense can have substantial long-term interests in resource systems. An authorised user, for example, can have long-term rights to catch fish, but no influence over fishing rules and no power to stop others from fishing. A claimant would also have rights to set fishing rules, while a proprietor would add in the right of exclusion. None of these people, however, would have the key right of an owner, the right of alienation (Schlager and Ostrom, 1992).
This does not mean their rights are not real and valuable. It does mean, however, that proprietors and owners have a greater long-term incentive to invest in resource enhancement because they can exclude others from the resulting benefits. Authorised users on the other hand (such as recreational fishers), with no right to any involvement in the development of access rules, may only comply with those rules if given a strong incentive to do so (Schlager and Ostrom, 1992).
As noted above, a common pool resource occurs where the resource is indivisible, exclusion is costly and use is rival. For some such resources, state sanctions can overcome the exclusion problem.
flexibility – extent to which the owner can change the mode or purpose of resource use without forfeiting the right
divisibility – ability to create joint ownership, to divide the asset spatially or by function, to construct temporal succession of rights
quality of title – enforceability, certainty, security, ease of establishing ownership to enforce other characteristics
exclusivity – specificity, excludability, how many other parties to agree with on use, absolute if no actions by others affect your use
duration – permanence, length & arrangements for renewal
transferability – assignability, exchangeability, tradeability (increased transferability equals reduced exclusivity)
- The value of a right will be greatest when it persists in perpetuity, is completely flexible, certain and secure, can be simply and costlessly transferred, and where others can be completely excluded from use of the right.
Common property rights are likely to develop for land where there is a low value of output per unit, highly variable resources, low returns from intensive investment, and large economies of scale in use and infrastructure. Participants desire accurate information about the resource, a common understanding of the benefits and risks of the status quo versus possible changes, norms of reciprocity and trust, stable membership, a long-term interest, collective choice rules that avoid unanimity or control by a less than a large majority, and accurate and low cost monitoring and sanctioning arrangements. Otherwise, efficiency of use will be reduced and the risk of resource depletion higher. Size and homogeneity of a group are also relevant but in a more complex manner.
There are also situations where individual ownership rights will be more efficient than common rights. This normally applies to land, where a formal title can significantly increase value, particularly through improved access to credit and incentives to invest. The same factors can apply to water and fishing, though individual environmental and social factors play a major role, and defining stocks and flows can be costly and uncertain. Crucial factors to define individual rights typically include measurement, monitoring and social acceptance of the legitimacy and fairness of the rules (Ostrom, 1999).
Access – right to enter and enjoy non-subtractive benefits
Withdrawal – right to obtain resource units or products of a resource system
Management – right to regulate internal use patterns and transform the resource through improvements
Exclusion – right to determine who will have access rights and withdrawal rights, and how those rights may be transferred
Alienation – the right to sell or lease management and exclusion rights