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Why does this book base its analysis on property rights? Because the concept of property rights is a powerful analytical tool capable of synthesizing many of the economic, legal, and political dimensions of institutional change. [2 ]Property rights assign decision-making authority over resources to individuals or groups. They are defined by formal laws and regulations as well as by informal customs and norms that affect the way the formal specifications are put into practice. Colloquial usage tends to interpret a 'property right' as a kind of absolute control over an asset, involving the right to use, the right to exclude others from use, the right to enjoy the revenue stream generated from its development, and the right to transfer or exchange it. In the real world almost all these aspects of property rights are conditioned and limited by institutions. From the standpoint of property rights theory, for example, the grant of a broadcasting license is a kind of property right, but the licensee's conduct is regulated and the duration of the grant is limited. Ownership of a home may be conditioned by zoning regulations, rent controls, and so on. In this book, the concept of property rights is applied very broadly to include all forms of decision-making authority over assets.
The particular way in which rights are specified has a powerful impact on the performance of an economy and the distribution of wealth. It determines the degree to which economic actors are able to reap the rewards of their investment in the owned resource. In a simple but valid example, Posner (1972) observes that if a farmer plants and cultivates corn but his neighbor is entitled to harvest and sell it, wealth is transferred from the farmer to the neighbor, and the farmer's planting and cultivation work is likely to be minimized or abandoned. In the real world, of course, the choices are not always that stark. They may involve, for example, a choice between various ownership forms (private, public, nonprofit), what restrictions to impose on the use of the property, what limits to impose on its sale or transfer, and so on. Each of these choices will shape incentives, alter the relative distribution of wealth, and affect the ability of an economy to move resources to the highest valued and most productive uses. [3 ]
Creating and maintaining property rights is not free. Before one can claim ownership of a resource, one must first be able to define workable boundaries that separate one person's claim from another's. One must also be able to enforce that claim by excluding trespassers, either by fencing them out or by patrolling the borders and sanctioning them. These activities are costly. The costs of defining and measuring claims to resources and of monitoring and enforcing specified rights are known as transaction costs. [4 ]In many cases, such as land rights, the costs of surveying, mapping, fencing, and monitoring may be low relative to the benefits that can be reaped from control of the property. But there are many other resources, such as marine fisheries, that may not be fenced in without prohibitive expense (given prevailing technology). Transaction costs may prevent any attempt to create separable, transferable property rights in such a resource. In such cases, conflicts over appropriation may be handled by government regulation, international agreements among governments, or other forms of collective action. [5 ]
[2 ]Property rights economics is a branch of institutional economics. The theory draws on classical political economy, neoclassical microeconomics, transaction cost economics, institutionalism, and noncooperative game theory. For a thorough exploration of its components, see Furubotn and Richter (1997). Rutherford's (1994) contrast of the 'old' and 'new' institutionalism is also a useful summary of the methods and theories of institutional economics. Ostrom, Gardner, and Walker (1994, 25-26), provide a summary of what they call institutional analysis and development literature.
[3 ]A review of research on the economics of property rights by DeAlessi (1980) concludes, 'The effects of alternate systems of property rights on behavior, and welfare, are substantial and pervasive' (40).
[4 ]The definition of transaction costs also includes costs associated with the contractual transfer of property rights, such as search costs, expenditures on negotiation, and the costs of monitoring and enforcing contracts.
[5 ]Ostrom (1990) explores some of these cases, showing how collective action can establish and enforce rules governing access to and use of the shared resource. These cooperative property regimes may succeed by sharing some of the monitoring and enforcement costs, and by eliminating the costs created by the need to define and measure individual claims. But they also raise some of the classic problems associated with collective action, such as free-rider problems and other kinds of opportunistic behaviors that occur when the incentives of individual actors diverge from the interests of the group. Ostrom sees this as a problem that can be overcome with the appropriate institutional design.
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