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.

Source: Valuation criteria from Scott (1988)[6] 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.[7] 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.

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.[8] 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).

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.