You are on page 1of 18

10880 Property

See Also intricacies of market interactions. Although Mill

and Marx accused their contemporaries of
▶ Consumer Expenditure discussing economics as if all the world had the
▶ Consumption function legal institutions of the North Atlantic seaboard,
▶ Life cycle hypothesis the accusation is not wholly just – and both of
them willingly exempted Smith in any case. For
many purposes, the economy an investigator is
concerned with can be assumed to have the legal
Benassy, J.P. 1975. Neo-Keynesian disequilibrium theory background of the countries of the North Atlantic
in a monetary economy. Review of Economic Studies littoral. Nor have economists been reluctant to
42: 502–523. broaden their interest in property. Speculation
Clower, R. 1965. The Keynesian counter-revolution: about the possibilities of socialism, the analysis
A theoretical appraisal. In The theory of interest
rates, ed. F. Hahn and F. Brechling. London: of the economics of slavery, inquiries into the
Macmillan. agriculture of developing countries and very
Garegnani, P. 1964–5. Note su consumi, investmenti, e much more besides have all provoked investiga-
domanda effectiva. Economia Internazionale. tions into the effects of particular systems of prop-
Reprinted in translation in Keynes’s economics and
the theory of value and distribution, ed. J. Eatwell and erty rights. Defences of the free market based on
M. Milgate, London: Duckworth, 1983. individual private property (Buchanan 1985),
Kahn, R.F. 1931. The relation of home investment to explorations of the outlook for workers’ coopera-
unemployment. Economic Journal 41(June): 173–198. tives (Vanek 1970), assessment of the efficiency
Keynes, J.M. 1936. The General theory of employment,
interest and money. London: Macmillan. of American slavery (Fogel and Engerman 1974)
Malinvaud, E. 1977. The theory of unemployment and the literature provoked by Coase’s demonstra-
reconsidered. Oxford: Blackwell. tion of the irrelevance to overall welfare of the
distribution of property rights are only a fraction
of what economists have done.
No definition of ownership is wholly satisfac-
Property tory for all purposes; ‘the right of property is the
right of dealing with things in the most absolute
Alan Ryan fashion the law allows’, declares the French civil
code, and it is echoed in many other codes. That
seizes on two crucial things. First, it is not an
infringement of my ownership of this knife that
Property rights are as fundamental to economics I may not stick it in your chest. The law allows
as scarcity and rationality. Unless some human nobody to stick a knife in anybody’s chest, but
agency has the right to control the use of whatever whatever anyone may lawfully do with any knife,
resource is in question nobody can set prices, and I (and nobody else) may do with this one. Second,
there will be no incentive for anyone to calculate the owner must have all the rights anyone can
costs of production. In much of their work, econ- have over the things in question. The suggestion
omists can, and do, take it for granted that every- sometimes encountered in textbooks that owner-
thing of value (both tangible goods and intangible ship can be reduced to a ‘right to an income’ is
objects such as skills) has an owner, and that the inadequate, because it mistakes one element in
owner’s powers of control will correspond to the ownership for the whole. Ownership certainly
motivational assumptions of orthodox economic grounds the right to an income, but many rights
theory. That the free market and ‘the liberal con- to an income are grounded on something other
ception of ownership’ (Honoré 1961) imply one than ownership, and ownership embraces other
another is obvious enough, and rightly allows rights than the right to an income. The code civile
most economists to feel free to leave the nature is right to emphasize this, but does not deal with
of ownership to others, while they tackle the our intuition that if the law circumscribed too
Property 10881

closely what an owner might do with his ‘prop- regarded as) ‘belonging to us all’ but as ‘belong-
erty’, we might hesitate to call it his property at all. ing to no one’. Unless owned as private property,
If, for instance, nobody could leave land to their land and other resources would be neglected. But
children, or sell a freehold in it, or raise a mort- although private property was essential if people
gage on it, we should be doubtful whether indi- were to live in moderate comfort, Aristotle did not
viduals could be said to) ‘own’ it at all. The crucial approve of the market; he complained that profit
element in the ‘ius utendi et abutendi’ is the ulti- making was a distraction from the proper use of
mate power of disposal. It is, therefore, not only a goods – which existed to be consumed not
question of having all the rights the law allows, traded – and that lending money at interest was
but of the law conferring on some person or insti- doubly wicked, because it was setting barren
tution the right of disposal. The same observation metal to breed. Ownership, and especially land
casts doubt on theories of so-called ‘new property ownership, existed in order to give the better sort
rights’. As did theorists of the ‘new class’, writers of people the leisure to cultivate their talents and
who have claimed to identify ‘new property govern wisely.
rights’ have observed, rightly, that in a socialist Neither the Greeks nor the Romans had much
society where there is supposedly no private own- use for the conception of individual rights which
ership of the means of production, individuals in provides the framework of modern discussions of
favoured positions may exert the same power as property. None the less, it was the Roman Law
did capitalist owners of businesses in the past or conception of ownership that bred modern theo-
have the same security of occupation and income ries of natural right and of a natural right of prop-
as did those owners; similarly, those protected by erty, just as it was Roman thinking about practical
trade unions in mixed economies may have the politics that bred a rival habit of thought. This is
same security as those who purchased military the tradition of ‘statecraft’ and is exemplified in
commissions or government offices in the eigh- the work of Machiavelli and Harrington, and to a
teenth century. Where they have gone wrong is in lesser extent in Hume and Smith. A crucial ques-
thinking of these as property rights. For they have tion to be asked of any system of property rights is
simply ignored the question of who has the right whether it favours political stability and political
of disposal. They may well be right to think that liberty. The question is one of political
these new powers are as important as ownership sociology – what kind of property encourages
and even that they confer on people powers sim- public spirit in the citizen, and what kind encour- P
ilar to those which ownership confers. They are ages ‘corruption’ in the ruling class? The exem-
wrong to think that they amount to ownership. plary figure of the Roman farmer who kept his
Until the eighteenth century, and perhaps later, weapons over his fireplace and would fight for
property was a central concern of political theo- republican institutions against enemies from with-
rists. Plato began a long tradition in demanding out and would-be tyrants from within haunts this
that the rulers of the ideal republic should have no tradition. Adam Smith, who is rightly thought of
property. They should possess in common the as the apostle of the modern economy, was
common property of the republic, to separate equally taken with the ancient conviction that
their private interests from the public interest. He military valour, public spirit and free institutions
was not concerned, as St Paul was, to condemn were inconsistent with a wholly commercial econ-
avarice and urge men to set their hearts on the omy. Small, independent farmers were the source
goods of the next world; rather he was concerned of republican virtue. Their independence was not
to avoid class warfare and to secure uncorrupt the same thing as modern individualism; they
leadership. The lower classes were welcome to must be independent of the wealthy but they
engage in their usual occupations and hang on to would not think of their land as theirs so much
whatever few possessions those occupations as their family’s. In Machiavelli, the argument is
yielded. Aristotle began an equally long tradition entirely nostalgic; by the time of Harrington, there
by observing that common property would not be is more understanding of the impossibility of
10882 Property

simply recreating the Roman republic; Hume and govern ownership, that is a matter of expediency.
Smith saw that the modern, fluid, commercial But where Hume thought that expediency
world in which money is the great solvent of favoured custom and prescription even at the
other forms of property cannot be escaped and price of considerable inefficiency, Mill argued
cannot be wholly regretted. It is then an open for positive governmental pressure by way of the
question what balance of social forces can pre- law on property to promote efficiency on the one
serve freedom. It goes without saying that this hand and the creation of an economy of producer
‘political’ conception of liberty with its roots in cooperatives on the other.
stable, landed property is not congenial to critics In a very different idiom, Kant and Hegel also
of the welfare state and socialism, who identify explained property as the expression of human
freedom with what Smith termed ‘the simple sys- freedom. Human beings, who alone possessed
tem of natural liberty’ or freedom of contract. free-will, conferred value on the merely material
The ‘statecraft’ tradition does not enquire into objects they took into ownership. Without owner-
the origins of property rights, nor into the justice ship, the world of mere material objects is inert,
of present distributions of property, but only into useless and of no value. But if property in some
their political results. The natural law tradition form or other is essential, the particular form is a
(and its successors) is concerned with justice, matter for different governments to decide for
and with what Locke called the ‘original’ of prop- themselves. Kant and Hegel were fierce enemies
erty. By ‘original’ he did not mean its historical of the feudal hangovers which disfigured the Ger-
origins but its moral logic. The crucial questions man states of their day. Neither advocated com-
which this tradition faces are not sociological but plete laissez-faire, but since property expresses
moral – what grounds a valid claim to ownership; human sovereignty over nature, it must be open
is there a conflict between the goals of property as to any individual to acquire property by his own
an institution and the distribution of property work. This rather romantic justification of prop-
rights in practice? From Locke, through Hume, erty rights was turned on its head by Marx, when
Rousseau, Kant, Hegel, Mill and their successors, he declared that the irrationality of capitalism and
a variety of answers was offered, some of which its evident moral failings showed that so long as
had a clear tendency to justify the status quo, some there was property at all, things would be sover-
of which, as in Rousseau on the one hand and Mill eign over men and men would continue to suffer
on the other, led to its rejection. Natural rights alienation. On the whole this argument has
theories like Locke’s held that each individual appealed to Marxist philosophers rather than
had a right to appropriate and use the unowned Marxist economists; the economist feels he can
bounty of nature; the exercise of his natural liberty analyse the consequences of different systems of
was enough to give him the ownership of it. Did it public ownership, but has little to say about what a
follow that the propertyless labourer in contem- world without the very concept of property would
porary society had been cheated? Locke thought be like.
not; so long as he can earn a livelihood by his In the mixed economies of the West, some
labour, he can ‘appropriate’ what he needs. But it kind of utilitarian justification of property is the
does follow that owners who fail to provide ‘common sense’ of politics, even if most writers
employment commit an injustice. Rousseau held now acknowledge that the defence of private
the same view, but complained that in practice the property needs to take into account questions of
owners reduced the propertyless to near slavery justice as well as questions of overall efficiency.
and that even where they did not they corrupted John Rawls’s insistence on appraising economic
them in other ways. institutions from the standpoint of the represen-
Hume and Mill offered a utilitarian justifica- tative least-favoured person (Rawls 1972) has
tion for property. Unless there are rules of ‘meum captured the imagination of writers of a broadly,
et tuum’, there will be no efficient employment of but uneasily utilitarian persuasion. The least
the world’s resources; as to what rules should abashed intellectual heirs of eighteenth and
Property Law, Economics and 10883

nineteenth-century utilitarianism are the Honoré, A.M. 1961. Ownership. In Oxford essays in
defenders of the so-called ‘economic theory of jurisprudence, ed. A.G. Guest. London: Oxford Uni-
versity Press.
property rights’. In this account the property Rawls, J. 1972. A theory of justice. Oxford: Clarendon.
rights characteristic of developed capitalist econ- Vanek, J. 1970. The general theory of labour-managed
omies came into existence by an evolutionary market economies. Ithaca/London: Cornell University
process which allowed production to proceed in Press.
ever more efficient ways. The capitalist firm, say,
exists because a system of property rights devel-
oped which allowed entrepreneurs to act swiftly
and decisively. One implication is that a govern- Property Law, Economics and
ment which forced some other ownership pattern
on the economy would find that evolutionary Dean Lueck
pressures would gradually reintroduce de facto
capitalism and that only political repression
could preserve socialism. The value of property
rights lies in the pattern of resource management Abstract
(in the widest sense) that they promote; what This entry shows how the economics of prop-
Marx condemned as) ‘bourgeois’ forms of own- erty rights can be used to understand funda-
ership create the most efficient management. mental features of property law and related
Critics complain that this suffers from the same extra-legal institutions. It examines both the
defects as other doctrines of ‘the survival of the rationale for legal doctrine and the effects of
fittest’ – it takes its standard of fitness from the legal doctrine regarding the exercise, enforce-
behaviour of the institutions it explains. But this ment, and transfer of rights. It also examines
is certainly one place where the discussion of various property rights regimes including open
property rights most vividly engages the con- access, private ownership, common property,
cerns of lawyers, economists and philosophers and state property. Property law is understood
alike. as a system of societal rules designed to create
incentives for people to maintain and invest in
assets, which in turn leads to specialization and
trade. P
See Also
Akerlof, G.: and land markets; Asymmetric
▶ Entitlements
information; And adverse selection; And ser-
vitudes; Average product rule; Coase Theo-
Bibliography rem; Common interest communities;
Common property; Compensation; And
Alchian, A., and H. Demsetz. 1972. Production, informa- investment decisions; Contracting: costs;
tion costs and economic organization. American Eco-
nomic Review 62(5): 777–795. Epstein, R.: and alienability of rights; Exter-
Buchanan, A. 1985. Ethics, efficiency and the market. nalities; Common law responses;
Totowa/Oxford: Rowman & Allanheld/Clarendon Neighbourhood; First possession; Land use:
Press. servitudes; Liability rules: vs. property rules;
Buchanan, J.M. 1986. Liberty, market and state. Brighton:
Wheatsheaf Books. Negligence: vs strict liability; Open access
Coase, R. 1960. The problem of social cost. Journal of Law property; Paradox of compensation; Posner,
and Economics 3: 1–44. R.: and eminent domain; Private property;
Demsetz, H. 1967. Towards a theory of property rights. Property law: externalities; Property rights;
American Economic Review, Papers and Proceedings,
57: 347–359. Regimes; Origins; Alieneability; Property
Fogel, R.W., and S.L. Engerman. 1974. Time on the cross. rules: vs liability rules; Public trust; Rule of
New York: Little, Brown. capture; Servitudes; And asymmetric
10884 Property Law, Economics and

information; Social norms: and property rights; damage, while the rancher would accept any
State property; Strict liability: vs negligence; amount greater than his marginal profit, p0 (h).
Takings: and US Constitution; Regulatory; If transaction costs are zero, the parties will
Transaction costs; And Coase Theorem; Tres- instantly contract to reduce the herd to the effi-
pass: vs nuisance; Zoning cient size. The farmer will purchase the rights to
the straying cattle, and if the farmer had the
initial rights the situation would be reversed:
JEL Classifications either way the outcome is first-best. This is the
D23; D62; K11; K23 Coase Theorem: When transaction costs are zero
the allocation of resources will be efficient
Property law is the body of court enforced rules regardless of the initial assignment of property
that governs the establishment, use and transfer of rights. But transaction costs are not zero and thus
rights to land and those assets attached to it such as property rights are not perfectly defined (Allen
air, minerals, water, and wildlife. In economic 1999; Barzel 1997; Lueck and Miceli 2007) so
terms, property rights are defined as the property law becomes important in defining
(expected) ability of an economic agent to freely rights and determining the allocation of assets.
use an asset (Allen 1999; Barzel 1997; Lueck and Indeed, Coase’s (1960) discussion of nuisance
Miceli 2007; Shavell 2004) and represent a social law suggests an economic logic to the law in its
institution that creates incentives to use, to main- assignment of property rights among various
tain, and to invest in assets. Property rights may or parties to these disputes.
may not be enforced by courts; and because the
actions of courts are costly legal rights are but a
subset of economic property rights. In addition to Property Rights: Taxonomy and Models
law and regulations, property rights may be
enforced by custom and norms (see, for example, Property law recognizes several fundamental
Ellickson 1991) and by markets through repeated property rights regimes: private property, open
transactions. access, common property, and state property
(Lueck and Miceli 2007). Property law also rec-
ognizes mixed regimes. Consider a fixed asset
Property Rights, Transaction Costs, (such as a plot of land) used with a variable
and the Coase Theorem input (x) to produce a market output (Y = f (x)).
If the input price is w, then the first-best use
Consider Coase’s (1960) famous example of the (x*(w)) must maximize R = f (x)  wx and
rancher and farmer. The rancher’s cattle stray onto satisfy f 0 (x)Ð = w. The first-best value of the land
the farmer’s land causing crop damage. The is V  ¼ 0 R ðx , tÞert dt , where r is the
rancher’s profit, p(h) and the amount of crop discount rate.
damage d(h) are functions of the rancher’s herd If there is ‘open
 Paccess’ for n individuals, then
size h, so the first-best optimal herd size, h* max- output is Y ¼ f n
i¼1 i where xi is the effort of
imizes p(h)  d(h) and h* solves p0 (h) = d0 (h). the i individual, f () > 0 and f 0 () < 0, and the
th 0
This is also the choice made by a single farmer- opportunity cost of effort is wi. Each person can
rancher, Coase’s ‘sole owner’ case. If the rancher only capture (and thus own) the output in propor-
initially has the economic (and legal) right to tion to his share of effort, so each solves:
impose crop damage without penalty, he would
choose the herd size to maximize p(h), adding max Ri ¼ f i ðxi Þ  wi xi subject to f i
cattle until p0 (h) = 0, which implies hr > h*. The xi
" # !
farmer would be willing to pay up to d0 (h), his .X n Xn
marginal damage, for each steer that the farmer ¼ xi xi f xi (1)
i¼1 i¼1
removes from the herd in order to avoid crop
Property Law, Economics and 10885

On the assumption that users are homogeneous or out of custom (for example, common pastures);
(wi = wj. for all i 6¼ j), the Nash open access it may have legal (for example, riparian water
equilibrium is x = xoa(n, w1, . . ., wn), which rights) or regulatory (for example, hunting regu-
satisfies, lations) bases that have implicit contractual ori-
! ! gins. Common property is well documented for
X n .Xn
natural resource stocks in less developed econo-
ðn  1=nÞ f xi xi
mies (Bailey 1992; Ostrom 1990). It is also seen in
i¼1 i¼1
! modern ‘common interest communities’ (such as
condominiums, homeowner’s associations) where
 ð1=nÞf 0 xi
residents use quasi-governments to maintain com-
mon areas (such as pools, open space) and provide
¼ wi , i ¼ 1, . . . n: (2) local public goods (Dwyer and Menell 1998).
Contracting to form common property creates a
In the limiting case as n ! 1, (2) becomes f
 Pn  Pn group that can realize economies of enforcing
i¼1 xi = i¼1 xi ¼ w which is the famous exclusive rights. Equal sharing is a typical internal
‘average product rule’ (Gordon 1954; Cheung allocation rule; it avoids costs of measuring and
1970; Brooks et al. 1999). The limiting case enforcing individual use but still leads to overuse
implies that rents are completely
Pn Pn  dissipated, or compared with first-best. With equal sharing rules
R ¼ f ð
i oa
x Þ  wx oa
¼ 0 and the a homogeneous membership maximizes the pre-
i¼1 i i¼1 Ð1
present value of the asset is also zero, V oa ¼ 0 sent value of a common property resource (Lueck
Rðxoa , tÞert dt ¼ 0: With heterogeneous costs, the 1994, 1995).
infra-marginal users earn rents and have incen- Governments own vast amounts of land, build-
tives to maintain open access regime (Libecap ings, and capital equipment. State property rights
1989). are governed by administrative agencies, and the
With private property the owner chooses range of property rights regimes incorporates
x* < xoa and generates V* > V oa = 0. Private aspects of the three major types: private property,
ownership also creates incentives for optimal common property, and open access. State property
asset maintenance and investment (Bohn and rights commonly – and often severely – limit the
Deacon 2000). Let future output be Yt+1 = f (xt), transferability of rights, perhaps to limit the moral
where xt is current investment, available at a mar- hazard incentives of agency bureaucrats. The rel- P
ket wage of w. and the  interest rate is r. The first- evant law for state property has its origins in
best use of the input xt must maximize R = f (xt)/ common law (for example, mining on federal
(1 + r)  wtxt and satisfy f 0 (xt)/(1 + r) = wt. If p  land is a first-possession rule) but is primarily
[0,1] is the probability of expropriation (because governed by statutes and regulations, all shaped
of imperfect rights) of the future output, then an by bureaucrats, interest groups and politicians.
owner will maximize R = f (xt)[(1   p)/ Real property regimes tend to mix the four
(1 + r)] = wtxt. The solution xpt < xt satisfies fundamental types: open access, private property,
f 0 (xt)[(1  p)/(1 + r)] = wt and implies less than common property and state property (Barzel
first-best investment. Pure open access means that 1982, 1997; Eggertsson 1990; Ellickson 1993;
no investor could claim future output (p = 1), so Kaplow and Shavell 1996; Merrill and Smith
t ¼ 0, and the rent from investment also equals
xoa 2000; Rose 1998; Stake 1999), implicitly recog-
zero. This lack of incentive to invest is essentially nizing that assets are a collection of valuable
the problem of the ‘anti-commons’ described by attributes. A rancher’s land is not typically
Heller (1998) and formalized by Buchanan and completely private: the streams running through
Yoon (2000). the property may be open access for fishing or
Common property is exclusive ownership by a recreation; the grass may be a lease from a federal
group and may arise out of explicit private agency with mineral rights held by yet another
contracting (for example, unitized oil reservoirs) private party. Similar scenarios are found in
10886 Property Law, Economics and

residential and commercial real estate, and Bailey temporal flow of output) is established. The opti-
(1992) found a mixture of ownership regimes mal time to establish ownership is when the pre-
among aboriginal peoples. Smith’s (2000) study sent value of the asset’s flow equals the present
of the common field system of medieval Europe is value of the opportunity
 cost of establishing rights
a rare study of the underlying economic logic of a g tS
at tS, or R eðr ¼ rCert . The asset value

mixed property regime.

falls short of first-best, or V S < V FB, because the
costs of establishing ownership delay ownership
and production to tS from t = 0.
Origin of Property Rights
First possession can dissipate value when there is
unconstrained competition among homogenous
In law and custom, first possession is the domi-
claimants (Barzel 1968; Mortensen 1982).
nant method of establishing rights, be it to the flow
A competitive rush to claim rights causes ownership
of output from a stock or to the stock itself (Lueck
to be established at exactly the time tR when the
1995). Let R(x(t)) be the flow of benefits from an
present value of the rental flow at tR equals the
asset, where x(t) is a variable input supplied at
present value of the entire costs of establishing own-
time t, r is the interest rate, and g < r is the rate at R
which R(t) grows over time. The first-best, full- ership at tR, or when R eðrgÞt /(r  g) = Cert R .
information outcome is In this ‘race equilibrium’ rights are established at tR,
where tR < tS since tR = (ln (r  g) + lnC  lnR)/g
ð1 and tS = (lnr + lnC – lnR)/g, and the rental stream is
V FB ¼ Rðx ðtÞÞeðrgÞt dt, (3) fully dissipated; or
ð1 h i
where x*(t) is the optimal input level and t* = 0 V ¼
Rðx ðtÞÞeðrgÞt dt  Cert ¼ 0:

since production begins immediately. tR

Under first possession the asset’s first claimant (5)
obtainsÐ exclusive rights to the temporal flow of
rents, 0 R ðtÞdt . Since establishing a bona fide Heterogeneity among claimants can reduce, or
claim will be costly and because g < r. property eliminate, dissipation (Barzel 1994; Lueck 1995).
rights to the asset will emerge as the value of the If there are two competitors (i and j) with posses-
asset increases (Demsetz 1967). Along these lines sion costs Ci < Cj, and neither party knows the
an entire literature has developed to explain the other’s costs, then i gains ownership just before
‘evolution of property rights’ or, more generally, j makes a claim, at ti = tR  e, and earns rent equal
the determinants – both temporal and cross section – to the present discounted value of his cost advan-
of property rights regimes (Lueck and Miceli 2007; tage. The key implication is that, as the differential
Rose 1998). This literature, mostly empirical, notes between the two lowest cost claimants (Cj  Ci)
that property rights regimes can move in both direc- increases, the level of dissipation will decrease.
tions (to and away from private property), that With complete information there is no dissipation
property rights regimes can move among mixed because only the low-cost claimant has a positive
regimes, and that political and other institutions expected payoff in a race (Fudenberg et al. 1983;
also shape the choice of property regimes. Harris and Vickers 1985).
Returning to first possession, a single claimant If the costs of enforcing a claim to the asset
will choose the claiming time to maximize are prohibitive, ownership may be established
only by capturing or ‘reducing to possession’ a
ð1 h i flow from the asset. The legal term ‘rule of
VS ¼ Rðx ðtÞÞeðrgÞt dt  Cert , (4) capture’ describes this derivative of the rule of
first possession. Wildlife and crude oil are the
where C is the cost of enforcing the claim and t is classic examples: ownership is established only
the time at which ownership of the stock (and the when a hunter bags a pheasant or when a barrel
Property Law, Economics and 10887

of oil is brought to the surface. The stock itself value per acre) each train causes, x is the cost of
(that is, the pheasant population or oil reservoir) precaution per train, and y is the cost of precaution
remains unowned. The new ‘race’ is to claim the by each farmer. Assume Dx < 0, Dy < 0 Dxx > 0,
present flow R(t) and leads to open access dissi- and Dyy > 0. The marginal benefits are bT(nT) and
pation (Epstein 1986; Lueck 1995) since Ð 1no one bF(nF), where b0j < 0:j ¼ T, F. The total value of
owns the asset’s entire stream of flows, 0 RðtÞdt the two activities is
. The formal analysis is static rather than inter-
ð nT ð nF
temporal as in the asset claim race, and is iden-
W¼ bT ðnT Þdu þ bF ðnF Þdz
tical to the open access model developed above 0 0
in eq. (1).
 ½nT nF Dðx, yÞ þ nT x þ nF y (6)
Property law implicitly recognizes the two
potential paths of dissipation – racing and over-
exploitation – and is structured to limit such dis- If the numbers of trains and farms are fixed, as
sipation (Dharmapala and Pitchford 2002; Lueck in tort models (Shavell 1980) that hold ‘activity
1995, 1998). Where first possession rules estab- levels’ fixed, the optimal precaution choices (x*,
lish ownership in a resource stock, first possession y*) that maximize (6) are nFDx(x, y) + 1 = 0 and
tends to be defined so that valid claims are made at nTDy(x, y) + 1 = 0. If the number of trains and
low cost and before dissipating races begin, thus farms (nT, nF) is endogenous, the resulting first-
exploiting claimant heterogeneity. Also, the trans- order conditions are bT(nT)  [nFD(x, y) + x] = 0
fer of rights to the resource is allowed, routinely and bF(nF)  [nTD(x, y) + y] = 0.
reflecting security of ownership in the corpus. Remedies for externalities can be viewed as a
Where the rule of capture emerges (for example, choice between ‘property rules’ and ‘liability
oil and wildlife) access to the resource tends to be rules’ (Calabresi and Melamed 1972; Polinsky
limited through legal, contractual or regulatory 1980). Under property rules, rights holders can
methods. As well, the transfer of rights to refuse any unwanted infringements of their rights,
capturable flows tends to be restricted in order to enforceable by injunctions (or criminal sanctions
limit overuse of the asset itself. in the case of theft). Property rules thus form the
legal basis for voluntary (market) exchange of
rights. With liability rules, however, owners can
Externalities and Property Law: only seek monetary compensation in the form of P
Nuisance, Trespass and Zoning damages. Liability rules thus form the basis for
court-ordered or non-consensual transactions.
Externalities arise because property rights to at The choice between the two rules turns on trans-
least some of the attributes of an asset will be action costs, particularly the costs of contracting,
imperfect and thus generate problems of open the costs of court adjudication, and legal adminis-
access or moral hazard. Land externalities are ubiq- tration. When contracting costs are relatively low,
uitous because any parcel (except an island) will property rules are preferred because they ensure
have neighbouring owners and because related that all transactions are mutually beneficial. When
resources (for example, air, noise, minerals, contracting costs are high (for example, in public
water) do not tend to coincide with the surface nuisance cases), property rules may prevent oth-
ownership boundaries. Property law addresses erwise efficient transactions from occurring. Lia-
externalities through doctrines of trespass, nui- bility rules have an advantage because courts can
sance, servitudes, and through regulatory zoning. force an efficient transfer. This advantage of lia-
Consider, à la Coase (1960), a railroad whose bility rules must be weighed against the possibil-
trains emit sparks that occasionally set fire to adja- ity of court error in setting damages, and, because
cent farmland. The number of trains is nT and the liability rules require courts to establish the initial
number of farms is nF, resulting in crop damage of terms of a transaction by setting damages, the
nTnFD(x, y), where D is the damage (reduced crop administrative costs of using this rule will likely
10888 Property Law, Economics and

be higher than under a property rule (Kaplow and 1975), creating what the common law calls a
Shavell 1996). ‘public nuisance’. Ellickson (1973) argues that
In the railroad–farmer case, if liability is strict zoning may have administrative and enforcement
the railroad must pay full compensation regardless costs that often exceed the saved ‘nuisance costs’.
of its level of precaution. Strict liability induces A private alternative to zoning is the use of land use
efficient precaution by the railroad, but farmers servitudes (for example, covenants, easements)
are fully compensated and thus have no incentive that impose limits on what landowners can do
for precaution. Negligence, which holds the rail- with their property. Such restrictions are frequently
road liable for damages only if it takes less than observed in condominiums, homeowner associa-
the efficient level of abatement, will induce both tions, and other ‘common interest communities’
parties to take efficient care. Neither rule, how- (Dwyer and Menell 1998; Hansmann 1991). The
ever, will achieve first-best railroad and farm economic function of these restrictions is twofold:
activity levels. In general, liability rules cannot to overcome free rider problems in the provision of
create first-best incentives because of the con- certain jointly consumed amenities; and to inter-
straint that what one party pays the other must nalize neighbourhood and rental externalities.
receive. This is an example of the paradox of
compensation which is also found in tort law
and contract law remedies (Cooter 1985). It can Public Trust, Public Property and
be avoided by ‘decoupling’ liability and compen- Public Use
sation, or by using a contract or compensation
mechanism that defines and enforces the optimal The ancient doctrine of ‘public trust’ grants own-
choices for both parties. ership of navigable rivers, shorelines, and the
Trespass (for example, squatting, boundary open sea to the public. It is judicially created
encroachment) and nuisance (for example, air, common property, or sometimes open access. In
water, noise pollution) doctrines are the primary its traditional application the public trust asset was
common law responses to externalities. The pri- a public good. When an asset is a public good,
mary remedy under trespass is an injunction, a unrestricted access will not cause dissipation from
property rule. The remedy under nuisance law is overuse of the resource, but it could lead to under-
more complicated. A landowner can obtain relief investment. When the resource has private good
only if the invasion is substantial, and even then characteristics, unrestricted access can trigger the
he may have to be satisfied with money damages rule of capture and creates a classic open access
(a liability rule). If a landowner wishes the harm to problem, possibly causing resource degradation
be enjoined, he must meet the further legal stan- through overuse. Some courts have recently
dard of showing that the harm outweighs the extended the doctrine into environmental assets,
benefit of the nuisance-creating activity. The such as beaches, lakes, stream access and wildlife.
trespass–nuisance distinction can be understood Large-scale projects like dams, railroads and
as a property–liability rule choice (Merrill 1998). highways often involve the assembly of a large
Trespass ordinarily involves a small number of contiguous parcel of land from relatively small
parties where the intruder is easily identifiable, and separately owned parcels. Developers face a
so contracting costs tend to be low and property potential holdout problem because, once assem-
rules are likely optimal. Nuisance often involves bly becomes public information, parcel owners
large numbers or sources of harm that are difficult might hold out for prices in excess of their true
to identify, so liability rules are likely optimal. valuations, endangering completion of an other-
Zoning is a common legal response to urban wise efficient project. One solution is to force
land externalities. The economic rationale for sales by replacing property rule protection of
zoning is that ‘similar land uses have no (or only each owner’s land with liability rule protection.
small) external effects on each other whereas dis- This is the economic justification for the eminent
similar land uses may have large effects’ (White domain power of the state (Posner 2003), which
Property Law, Economics and 10889

has common law origins. The ‘takings’ clause of regulation becomes especially burdensome, the
the Fifth Amendment of the US Constitution affected landowner may claim that a ‘regulatory
explicitly grants such eminent domain power taking’ has occurred and seek compensation. As
for ‘public use’ but requires ‘just compensa- above, the trade-off for regulatory takings con-
tion’, which courts have interpreted to mean cerns the efficiency of the land use decision on
‘fair market value’. Since subjective value is the one hand and the regulatory decision on the
part of the opportunity cost of a taking, failure other. Miceli and Segerson (1994, 1996) propose
to compensate for it potentially results in exces- the following compensation rule, where y is a
sive acquisition of land by the government, landowner’s lost value from the regulation:
though one study (Munch 1979) found that

high-valued properties were overcompensated, 0 if y  y
C¼ (7)
while owners of low-valued properties were V ðxÞ, if y > y :
A large literature has studied the link between Like a negligence rule in tort law, this rule
compensation and investment decisions of land- requires full compensation if the government
owners (Blume et al. 1984; Fischel and Shapiro over-regulates (y > y*) but requires no compensa-
1988). Suppose there are many parcels, each tion otherwise (y  y*). It also establishes a stan-
worth V(x) if the landowner makes an irreversible dard that is economically equivalent to the
investment x, where V 0 > 0 and V 00 < 0. The land common law definition of a nuisance (an activity
also yields a public benefit of B(y), where y is the that is efficiently prohibited), and hence is consis-
number of parcels taken and B0 > 0, B00 < 0. tent with the threshold for compensation implied
Compensation of C(x) will be paid for each parcel by the nuisance exception.
taken, where C(x)  0, C0  0, and total compen-
sation is yC(x). Landowners choose x given the
anticipated behaviour of the government and the Inalienability of Property Rights
compensation rule; then the government chooses
y and pays C(x). The first-best choices (x*, y*) Posner (2003, p. 75) notes, ‘the law should, in
maximize B(y) + (1  y)V (x)  x, the sum of principle, make property rights freely transferable
private and public benefits, and must satisfy in order to allow resources to move to their most
(1  y) V 0 (x)  1 = 0 and B0 (y)  V(x) = 0. If highly valued uses and to foster the optimal con- P
the taking is exogenous, y is fixed and the land- figuration of assets.’ Yet there are many legal
owner will maximize (1  y) V (x) + yC(x)  x, restrictions that limit the alienability of property:
which must satisfy (1  y) V 0 (x) + yC0 (x)  1 = 0 body parts, children, voting, military service, cul-
and also gives xl as the solution. This means that tural artifacts, endangered animal species, the
compensation must be lump sum (C0 = 0) to right to freedom (laws against slavery), certain
ensure that xl = x*; a positive relationship between natural resources and state property.
x and compensation creates over-investment The dominant economic reason for restrictions
moral hazard (another example of the paradox of on alienability is that externalities can arise from
compensation). Thus no compensation (C(x)
0 transfers (Barzel 1997; Epstein 1985; Rose-
for all x) is actually efficient, although any lump Ackerman 1985; Posner 2003) if the rights to the
sum rule is consistent with efficiency. The effi- assets are not well-defined with respect to the
ciency of zero compensation, however, depends stock (and its stream of flows over time). This
on assumptions about government behaviour. generates a rationale for limiting, even pro-
Government regulations often restrict land hibiting, certain transfers of the claimed flows in
uses without depriving the owner of title (for order to protect the asset and its value. For exam-
example, zoning laws, environmental regula- ple, the widespread prohibition on trade in wild
tions). Historically, courts have granted broad game is likely to be such a case (Lueck 1989,
powers to enact such regulations but, when a 1998), though even here limits on markets can
10890 Property Law, Economics and

potentially deter the formation of property rights. study is a systematic analysis of how the law
Restrictions on the sale of children may have a addresses the use and transfer of complex assets.
similar rationale: a market for children (or game)
would lead to ‘poaching’ of kids (or animals) for
which property rights enforcement is extremely See Also
Another reason for restricting transfers is ▶ Akerlof, George Arthur (Born 1940)
asymmetric information, particularly that leading ▶ contract Theory
to adverse selection (Rose-Ackerman 1998). ▶ Law, Economic Analysis of
Adverse selection can potentially dry up markets ▶ Tragedy of the Commons
where product quality cannot be observed prior to
purchase. Similar restrictions on the types of prop-
erty servitudes allowed (such as limits on ‘nega- Bibliography
tive and in gross’ easements) might be explained
by reference to asymmetric information (Dnes and Akerlof, G. 1970. The market for ‘lemons’: Quality uncer-
Lueck 2006). Legal scholars have argued that tainty and the market mechanism. Quarterly Journal of
limitations on servitudes prevent ‘clogging title’ Economics 84: 488–500.
Allen, D. 1999. Transaction costs. In Encyclopedia of law
(Gray and Gray 2000). Consider the market for and economics, ed. B. Bouckaert and G. DeGeest, Vol.
land of two types: fee simple (that is, unencum- I. Cheltenham: Edward Elgar.
bered) and land encumbered with a servitude. Bailey, M. 1992. Approximate optimality of aboriginal
Assume that only the seller knows whether the property rights. Journal of Law and Economics 35:
land is encumbered. Buyers do not have this Barzel, Y. 1968. The optimal timing of innovations. Review
information but know only that one-half of the of Economics and Statistics 50: 348–355.
land is encumbered. The value of an unencum- Barzel, Y. 1982. Measurement cost and the organization of
bered plot is V f, while the value of the encumbered markets. Journal of Law and Economics 25: 27–48.
Barzel, Y. 1994. The capture of wealth by monopolists and
plots is V s < V f. Given the information asymme- the protection of property rights. International Review
try, buyers will pay only the expected value of a of Law and Economics 14: 393–409.
plot, EV = (V + V f)/2 < V f. Following Akerlof Barzel, Y. 1997. Economic analysis of property rights.
(1970) and related literature, this means there will 2nd ed. Cambridge: Cambridge University Press.
Besley, T. 1998. Investment incentives and property rights.
be no market equilibrium for the unencumbered In The new Palgrave dictionary of economics and the
plots; that is, only ‘low-quality’ encumbered plots law, Vol. 2, ed. P. Newman. New York: Stockton Press.
will be present in the market. Institutions that Blume, L., D. Rubinfeld, and P. Shapiro. 1984. The taking
provide information (such as title recording and of land: When should compensation be paid? Quarterly
Journal of Economics 99: 71–92.
registration systems) could eliminate asymmetry Bohn, H., and R.T. Deacon. 2000. Ownership risk, invest-
and even alter the law of property by allowing an ment, and the use of natural resources. American Eco-
expanded set of servitudes. nomic Review 90: 526–549.
Brooks, R., M. Murray, S. Salant, and J. Weise. 1999.
When is the standard analysis of common property
extraction under free access correct? Journal of Politi-
Summary cal Economy 107: 843–858.
Buchanan, J., and Y.J. Yoon. 2000. Symmetric tragedies:
Economic analysis reveals a fundamental logic to Commons and anticommons. Journal of Law and Eco-
nomics 43: 1–14.
the main doctrines and features of property law Calabresi, G., and A. Melamed. 1972. Property rules, lia-
(Lueck and Miceli 2007). The observed structure bility rules, and inalienability: One view of the cathe-
of property rights and property law can be best dral. Harvard Law Review 85: 1089–1128.
understood as a system designed to create incen- Cheung, S. 1970. The structure of a contract and the theory
of a nonexclusive resource. Journal of Law and Eco-
tives for people to maintain and invest in assets, nomics 13: 49–70.
which in turn leads to specialization and trade. Coase, R. 1960. The problem of social cost. Journal of Law
Among the most important remaining issues for and Economics 3: 1–44.
Property Law, Economics and 10891

Cooter, R. 1985. Unity in tort, contract, and property: The Lueck, D. 1995. The rule of first possession and the design
model of precaution. California Law Review 73: 1–51. of the law. Journal of Law and Economics 38: 393–436.
Demsetz, H. 1967. Toward a theory of property rights. Lueck, D. 1998. Wildlife law. In The new Palgrave dictio-
American Economic Review 57: 347–359. nary of economics and the law, ed. P. Newman,
Dharmapala, D., and R. Pitchford. 2002. An economic Vol. 3. New York: Stockton Press.
analysis of ‘riding to hounds’: Pierson v. Post revisited. Lueck, D., and T. Miceli. 2007. Property rights and property
Journal of Law, Economics, and Organization 18: law. In Handbook of law and economics, ed. A. Polinsky
39–66. and S. Shavell. Amsterdam: North-Holland.
Dnes, A., and D. Lueck. 2006. An economic analysis of Merrill, T. 1998. Trespass and nuisance. In The new Pal-
servitudes on land. Unpublished manuscript. grave dictionary of economics and the
Dwyer, J., and P. Menell. 1998. Property law and policy: law, ed. P. Newman, Vol. 3. New York: Stockton Press.
A comparative institutional perspective. Westbury: The Merrill, T., and H. Smith. 2000. Optimal standardization in
Foundation Press. the law of property: The numerus clausus principle.
Eggertsson, T. 1990. Economic behavior and institutions. Yale Law Journal 110: 1–70.
Cambridge: Cambridge University Press. Miceli, T. 1997. Economics of the law: Torts, contracts,
Ellickson, R. 1973. Alternatives to zoning: Covenants, property, litigation. New York: Oxford University Press.
nuisance rules, and fines as land use controls. Univer- Miceli, T., and K. Segerson. 1994. Regulatory takings:
sity of Chicago Law Review 40: 681–782. When should compensation be paid? Journal of Legal
Ellickson, R. 1991. Order without law: How neighbors Studies 23: 749–776.
settle disputes. Cambridge, MA: Harvard University Miceli, T., and K. Segerson. 1996. Compensation for reg-
Press. ulatory takings: An economic analysis with applica-
Ellickson, R. 1993. Property in land. Yale Law Journal tions. Greenwich: JAI Press.
102: 1315–1400. Mortensen, D. 1982. Property rights and efficiency in
Epstein, R. 1979. Possession as the root of title. Georgia mating, racing, and related games. American Economic
Law Review 85: 1221–1243. Review 72: 968–979.
Epstein, R. 1985. Why restrain alienation? Columbia Law Munch, P. 1976. An economic analysis of eminent domain.
Review 85: 970–990. Journal of Political Economy 84: 473–497.
Epstein, R. 1986. Past and future: The temporal dimension Ostrom, E. 1990. Governing the commons: The evolution
in the law of property. Washington University Law of institutions for collective action. New York:
Quarterly 64: 667–722. Cambridge University Press.
Fischel, W., and P. Shapiro. 1988. Takings, insurance, and Polinsky, A. 1980. On the choice between property rules
Michelman: Comments on economic interpretations of and liability rules. Economic Inquiry 18: 233–246.
‘just compensation’ law. Journal of Legal Studies 17: Posner, R. 2003. Economic analysis of law. 6th ed. New
269–293. York: Aspen Law and Business.
Fudenberg, D., R. Gilbert, J. Sitglitz, and J. Tirole. 1983. Rose, C. 1985. Possession as the origin of property. Uni-
Preemption, leapfrogging, and competition in patent versity of Chicago Law Review 53: 73–88.
races. European Economic Review 22: 3–31. Rose, C. 1986. The comedy of the commons, custom, P
Gordon, H. 1954. The economic theory of a common- commerce, and inherently public property. University
property resource: The fishery. Journal of Political of Chicago Law Review 53: 711–781.
Economy 62: 24–42. Rose, C. 1998. Evolution of property rights. In The new
Gray, K., and S. Gray. 2000. Elements of land law. Palgrave dictionary of economics and the law,
3rd ed. London: Butterworths. ed. P. Newman, Vol. 2. New York: Stockton Press.
Hansmann, H. 1991. Condominium and cooperative hous- Rose-Ackerman, S. 1985. Inalienability and the theory of
ing: Transactional efficiency, tax subsidies, and tenure property rights. Columbia Law Review 85: 931–969.
choice. Journal of Legal Studies 20: 25–71. Rose-Ackerman, S. 1998. Inalienability. In The new Pal-
Harris, C., and J. Vickers. 1985. Perfect equilibrium in a grave dictionary of economics and the law,
model of a race. Review of Economic Studies 52: ed. P. Newman, Vol. 2. New York: Stockton Press.
193–209. Shavell, S. 1980. Strict liability versus negligence. Journal
Heller, M. 1998. The tragedy of the anti-commons: Prop- of Legal Studies 9: 1–25.
erty in transition from Marx to markets. Harvard Law Shavell, S. 2004. Foundations of economic analysis of law.
Review 111: 621–688. Cambridge, MA: Harvard University Press.
Kaplow, L., and S. Shavell. 1996. Property rules versus Smith, H. 2000. Semicommon property rights and scatter-
liability rules. Harvard Law Review 109: 713–790. ing in the open fields. Journal of Legal Studies 29:
Libecap, G. 1989. Contracting for property rights. 131–169.
Cambridge: Cambridge University Press. Stake, J. 1999. Decomposition of property rights. In Ency-
Lueck, D. 1989. The economic nature of wildlife law. clopedia of law and economics, ed. B. Bouckaert and
Journal of Legal Studies 18: 291–324. G. DeGeest, Vol. 2. Cheltenham: Edward Elgar.
Lueck, D. 1994. Common property as an egalitarian share White, M. 1975. Fiscal zoning in fragmented metropolitan
contract. Journal of Economic Behavior and Organi- areas. In Fiscal zoning and land use controls,
zation 25: 93–108. ed. E. Mills and W. Oates. Lexington: Lexington Books.
10892 Property Rights

restrictions on the feasible uses, but assignments

Property Rights of exclusive rights to choose among such uses. To
restrict me from growing corn on my land would
Armen A. Alchian be an imposed, or contrived, restriction denying
some rights without transferring them to others.
To deny me the right to grow corn on my land
would restrict my feasible uses without enlarging
Keywords anyone else’s feasible physical uses. Contrived or
Corporations; Exchange value; Firm; Theory unnecessary restrictions are not the basis of Pri-
of; Firm-specific resources; Fisheries; Govern- vate property rights. Also, because those restric-
ment property rights; Joint production; Limited tions typically are imposed against only some
liability; Moral hazard; Mutual property rights; people, those who are not so restrained obtain a
Ownership and control; Private property ‘legal monopoly’ in the activity from which others
rights; Property rights; Quasirent; Specializa- are unnecessarily restricted.
tion; Torts; Value Under Private property rights any mutually
agreed contractual terms are permissible, though
not all are necessarily supported by governmental
JEL Classifications enforcement. To the extent that some contractual
D0 agreements are prohibited, Private property rights
are denied. For example, it may be considered
illegal to agree to work for over ten hours a day,
Private Property Rights regardless of how high a salary may be offered. Or it
may be illegal to sell at a price above some politi-
A property right is a socially enforced right to select cally selected limit. These restrictions reduce the
uses of an economic good. A Private property right strength of private property, market exchange and
is one assigned to a specific person and is alienable contracts as means of coordinating production and
in exchange for similar rights over other goods. Its consumption and resolving conflicts of interest.
strength is measured by its probability and costs of
enforcement which depend on the government,
informal social actions, and prevailing ethical and Economic Theory and Private
moral norms. In simpler terms, no one may legally Property Rights
use or affect the physical circumstances of goods to
which you have Private property rights without A successful analytic formulation of Private prop-
your approval or compensation. Under hypotheti- erty rights has resulted in an explanation of the
cally perfect Private property rights none of my method of directing and coordinating uses of eco-
actions with my resources may affect the physical nomic resources in a private property system (that
attributes of any other person’s private property. For is, a capitalistic or a ‘free enterprise’ system). That
example, your Private property rights to your com- analysis relies on convex preferences and two
puter restrict my and everyone else’s permissible constraints: a production possibility and a private
behaviour with respect to your computer, and my property exchange constraint, expressible bibli-
Private property rights restrict you and everyone cally as ‘Thou Shalt Not Steal’, or mathematically,
else with respect to whatever I own. It is important as the conservation of the exchange values of
to note that it is the physical use and condition of a one’s good.
good that are protected from the action of others, For the decentralized coordination of produc-
not its exchange value. tive specialization to work well, according to the
Private property rights are assignments of well known principles of comparative advantage,
rights to choose among inescapably incompatible in a society with diffused knowledge, people must
uses. They are not contrived or imposed have secure, alienable Private property rights in
Property Rights 10893

productive resources and products tradable at jointly by several separately owned resources, it
mutually agreeable prices at low costs of negoti- is not possible to identify or define how much of
ating reliable contractual transactions. That sys- the final output value each resource could be said
tem’s ability to coordinate diffused information to produce separately. Instead, a marginal product
results in increased availability of more highly value for each input is definable and measurable.
valued goods as well as of those becoming less Whereas specialized production under compara-
costly to produce. The amount of rights to goods tive advantage and trade is directed in a
one is willing to trade, and in which Private prop- decentralized process by market price and spot
erty rights are held, is the measure of value; and exchanges, productivity in the team, called the
that is not equivalent to an equal quantity of goods firm, relies on long-term, constraining contracts
not held as private property (for example, govern- among owners who have invested in resources spe-
ment property). It probably would not be disputed cialized to the group of inputs in that firm. In partic-
that stronger Private property rights are more ular, some of the inputs are specialized to the team in
valuable than weaker rights, that is, a seller of a that once they enter the firm their alternative
good would insist on larger amounts of a good (salvage) values become much lower than in the
with weaker Private property rights than if Private firm. They are called ‘firm-specific’. In the firm,
property rights to the goods were stronger. firm-specific inputs tend to be owned in common
or else contracts among separate owners of the
various inter-specific resources restrict their future
Firms, Firm-Specific Resources and the options to those beneficial to that group of owners as
Structure of Property Rights a whole rather than to any individual. These con-
tractual restrictions are designed to restrain oppor-
Though Private property rights are extremely tunism and ‘moral hazard’ by individual owners,
important in enabling greater realization of the each seeking a portion of each other’s firm-specific,
gains from specialization in production, the expropriable composite quasi-rent. Taking only
partitionability, separability and alienability of extremes for expository brevity, the other ‘general’
Private property rights enables the organization resources would lose no value if shifted elsewhere.
of cooperative joint productive activity in the A firm, then, is a group of firm-specific and some
modern corporate firm. This less formally recog- general inputs bound by constraining contracts, pro-
nized, but nevertheless important, process of ducing a non-decomposable end-product value. As P
cooperative production relies heavily on a result, the activities and operation of the team will
partitioning and specialization in the components be most intensively controlled and monitored by the
of Private property rights. Yet this method is often firm-specific input owners, who gain or lose the
misinterpreted as unduly restrictive and debilitat- most from the success or failure of the ‘firm’. In
ing to the effectiveness and social acceptability of fact, they are typically considered the ‘owners’ or
Private property rights. To see the error, an under- ‘employers’ or ‘bosses’ of the firm, though in reality
standing of the nature of the firm is necessary, the firm is a cooperating collection of resources
especially in its corporate form, which accounts owned by different people.
for an enormous portion of economic production. Firm-specific resources can be non-human. Pro-
The ‘firm’, usually treated as an output-generating fessional firms – in law, architecture, medicine –
‘black box’, is a contractually related collection of are comprised of teams of people who would be
resources of various cooperating owners. Its dis- less valuable elsewhere in other groups. They hire
tinctive source of enhanced productivity is ‘team’ non-human general capital, for complex example
productivity, wherein the product is not a sum of building and equipment. The contract, which
separable outputs each of which is attributable to defines ‘hiring’, depends on the specificity and
specific cooperating inputs, but instead is a non- generality, not on human or non-human attributes
decomposable, non-attributable value produced nor on who is richer. Incidentally, ‘industrial
by the group. Thus, for something produced democracy’ arrangements are rare, because the
10894 Property Rights

owners of more general resources have less interest When voluntary separability of decision author-
in the firm than those of specific resources. ity over firm-specific resources from their market
value consequences is added to alienability, the
ability to specialize in managerial decisions and
The Corporation and Specialization in talent (control) without also having to bear the
Private Property Rights risk of all the value consequences, enables achieve-
ment of beneficial specialization in production and
In a corporation the resources owned by the stock- coordination of cooperative productivity. Speciali-
holders are those the values of which are specific zation is not necessarily something that is confined
to the firm. The complexities in specialization in to the production of different end products; it
exercise of the components of property rights and applies equally to different productive inputs or
the associated contractual restraints have led some talents. Voluntary partitionability and alienability
people to believe that the corporation tends to of the component rights enable advantageous spe-
insulate (for example, ‘separate’) decisions of cialization (sometimes called ‘separation’) in (a)
use from the bearing of the consequences (that exercise of rights to make decisions about uses of
is, control from ownership) and thereby has resources and (b) bearing the consequent market or
undermined the capacity of a private property exchange values. The former is sometimes called
system to allocate resources to higher market ‘control’ and the latter, ‘ownership’. Separability
value uses. For example, it has been argued that enables the achievement of the gains from special-
diffused stock ownership has so separated man- ization in selecting and monitoring uses, evaluating
agement and control of resources from ‘owner- the results, and bearing the risk of consequent
ship’ that managers are able to act without future usefulness and value. Because different
sufficient regard to market values and the interests uses have different prospective probability distri-
of the diffused stockholders. Adam Smith was butions of outcomes, and because outcomes are
among the first to propound that belief. Whatever differentially sensitive to monitoring the prior deci-
the empirical validity, the logical analysis under- sions, separability and alienability of the compo-
lying those charges rests on misperceptions of the nent rights permit gains from specialization in
structure of Private property rights in the corpora- holding and exercising the partitionable rights.
tion and the nature of the competitive markets for Thus, the modern corporation relies on limited
control and ownership which tend to restrain such liability to enhance alienability and on partition-
managers. What individual managers seek, and ability of components of Private property rights in
what those who survive are able successfully to order to achieve gains from large-scale specializa-
do in the presence of competition for control, are tion in directing productive team activity and talents.
very different things. Rather than destroying or undermining the effective-
An advantage of the corporation is its pooling ness of Private property rights, the alleged ‘separa-
of sufficient wealth in firm-specific resources for tion’ enables effective, productive ‘specialization’ in
large-scale operations. Pooling is enabled if exercising Private property rights as methods of
shares of ownership are alienable private property, control and coordination.
thereby permitting individuals to eliminate depen-
dence of their time path of consumption on the
temporal pattern of return from firm-specific Government Property Rights
investments. Alienability is enabled if the shares
have limited liability, which frees each stock- It might be presumed that Government property
holder from dependence on the amount of wealth rights in a democracy are similar to corporate
of every other stockholder. The resultant ability to property with diffused stockholdings and should
tolerate anonymity, that is, disinterest in exactly yield similar results. The analogy would be apt if
who are the other shareholders, enables better each voting citizen had a share of votes equivalent
market alienability. to one’s share of the wealth in the community, and
Property Rights 10895

if a person could shift wealth among govern- private, reduce conformity of resource uses to
ments, as one can among different corporations. market revealed values. Alternatively, if commu-
If, for example, one could buy and sell land nal property rights mean that incumbent users can
(as assets capturing essentially most of the value block more users, the resource will be
of whatever the government does in that particular underutilized as incumbents maximize their indi-
state) in several different governments and could vidual yield, which is the average, not the mar-
vote in each in proportion to the value of that ginal. This results in fewer users. Though more
‘land’ then government property would be closer users or uses would lower the average value to the
to private property in its effects. But it is difficult incumbents and hence dissuade a higher rate of
to take that possibility seriously. The nature of use, the addition to the total group value (of the
government, public or communal property rights extra use) exceeds the extra costs. Examples are
surely depends on the kind of government. public, low tuition colleges that restrict entry to
Because these are so vaguely and indefinitely maximize the ‘quality’ of those who are
defined, attempts to deduce formally the conse- educated – that is, to maximize the average yield
quences of resource allocation and behaviour of those admitted. Some labour unions (that is,
under each have been hampered. teamsters) are examples of similar situations.
A mistaken inference commonly suggested by
the example of fishermen who overfish unowned
Non-Existent Property Rights lakes is that independent sellers with open access
to customers will ‘over-congest’ in product vari-
Not all resources are satisfactorily controlled by ety and advertising to catch customers, with
Private property rights. Air, water, electromag- unheeded costs borne by other sellers. If, for
netic radiation, noises and views are some exam- example, Pall Mall cigarettes attract some cus-
ples. Water under my land flows to yours. Sounds tomers from Camel, the loss to Camel is the
and light from my land impinge on yours. Other reduced value of Camel-specific resources, not
forms of control are then designed, for example, its lost sales revenue. General resources will be
political or social group decisions and actions, released from making Camels for use elsewhere
though these other forms are sometimes employed with no social loss. But Camel-specific resources
for ideological or political purposes, even where fall in value by the extent to which Pall Mall’s
Private property rights already exist. product is better or cheaper. Camel’s loss is more P
If these other forms permit open, free entry than offset by the sum of Pall Mall’s increased net
with every user sharing equally and obtaining income plus the transfer gain to customers from
the average return, use will be excessive. Extra lower prices or better quality. The loss to Camel is
uses will be made with an increased realized total not from new entry itself, but from its incorrect
value that is less than the cost added, that is, the forecasts of its earlier investment value. It is pre-
social product value is not maximized. This sumed here that mistaken forecasts should not be
occurs because the marginal yield is less than the protected by prohibiting the unexpected future
average to each user, to which each user responds. improvements. This differs from the over-fishing
So, use occurs to the point where the average yield case in that consumers, in contrast to fish, have
is brought down to marginal cost, with the conse- property rights in what they pay and what they
quence that the marginal yield is less than the buy. If every fish had a separate owner or owned
marginal cost – often exampled as excessive con- itself, none would allow it to be caught unless paid
gestion on a public road or public park, or over- enough, and over-fishing would not occur. One
fishing of communal, free access fishing areas. owner of all the fish is unnecessary; it suffices that
The classic ‘communal property’ implication each fish (or potential customer) be owned by
that apples on the public apple tree are never someone who can refuse to buy. (Of course,
allowed to ripen is an extreme example of the unless the lake were owned, the lake surface
proposition that property rights, other than might be over-congested with too many
10896 Property Rights

fishermen, each fishing to a lesser area, even if the although enabling a larger total social value with
fish were owned.) more members, would reduce the average value to
Ownership of tradable rights by customers is the existing members. This is an example of the
the feature that is missing in the over-fishing, earlier analysed difference between maximizing
over-congestion case. Because rights to (or ‘of’) the average yield per input rather than the total
the fish or whales need not be bought, over-fishing yield by admitting more members, who while they
does not imply over-customering where cus- would be made better off than if not admitted
tomers own rights to what the competing sellers nevertheless reduce the average value to the
are seeking. Otherwise, customers could be incumbent members. In addition, the ability of
caught like fish, wherein sellers would be com- newcomers to compensate incumbents for any
peting both to (1) establish property rights over loss in the individual (average) value to incum-
the customers and to (2) possess those rights. bent members is restrained if the membership fee
Costly redundant competition for initial establish- were to go instead to an outside owner of the club.
ment of rights could be avoided simply by To the extent that a pecuniary compensation, via
establishing customers’ rights to themselves, as an initiation fee, were paid to an outside owner
is in fact done. If the preceding seems fanciful, and exceeded the reduction in their average indi-
replace ‘fish’ with people and the lake surface vidual and total group utility, newcomers would
with streets on which taxi-drivers cruise for cus- be admitted, and the outside owner would gain,
tomers. Excessive costs will be incurred in com- but incumbent members would lose their compos-
petition for use of unowned, valuable resources, in ite quasi-rent of their interpersonal sociability.
this case, the streets. (It is not yet well understood why, aside from tax
reasons, the mutual form occurs in savings and
loans and insurance firms.)
Mutual Property Rights

‘Mutual’ forms of organization are used appar- Torts, Conditional and Unassigned
ently in order to sustain the maximum average Property Rights
per member, or to reserve for the incumbent mem-
bers any greater group value from more members. Private property rights may exist in principle, but,
Mutual private property, a form that has barely quite sensibly, not be blindly and uncompromis-
been analysed, does not permit anonymous alien- ingly enforced against all possible ‘usurpers’. For
ability of interests in what are otherwise Private example, situations arise in which someone’s pre-
property rights. A ‘mutual’ member can transfer sumed Private property rights do not exclude an
its interest to other people only upon permission ‘invader’s’ use. Accidental or emergency use of
of the other mutually owning members or their some other person’s private property without prior
agents. Fraternal, social and country clubs are permission constitutes an example, sometimes
examples. These activities have not typically called a ‘tort’. Another possibility is that the prop-
been viably organized and their services sold, as erty rights are so ill-defined that whether a right
for example, in restaurants and health and exercise has been usurped or already belonged to the
gymnasia. The intragroup-specific resources are alleged ‘usurper’ is unclear. For example, my
themselves the members (erstwhile customers) newly planted tree may block the view from
who interact and create their social utility. More your land. But did you have a right to look across
members affect each incumbent’s realized utility my land? If the rights to views (or light rays) were
in two ways: by social compatibility and by con- clearly defined and assigned, we could negotiate a
gestion. An outside, separate owner interested in price for preserving the view or my putting up a
the maximum value of the organization, but not tree, depending upon which was more valuable to
the maximum average-per-member, could the both of us and with payment going to whoever
threaten to sell more memberships which, proved to have the rights. Or, while sailing on a
Property Taxation 10897

lake, to escape a sudden storm and save my boat governments. Despite widespread use of the
and life, I use your dock without your prior per- property tax and a voluminous academic liter-
mission. Did I violate any of your rights, or did ature examining the tax, its incidence and eco-
your rights not include the right to exclude users nomic effects are still contentious issues, with
in my predicament? If such emergency action is the debate centring around whether the capital
deemed appropriate, then rights to use of the dock portion of the tax should be viewed as
are not all yours, as you may have thought. distorting the allocation of capital or as an
Whereas in the tree and view case, where a prior efficient benefit tax or user charge for local
negotiation might have avoided a ‘tort’ (except public services.
that initially we did not agree about who had what
rights), in the emergency use of the dock, prior Keywords
negotiation was unfeasible. If prior negotiation is Assessment process; Benefit tax; Capital tax;
uneconomic, rights to that emergency use Capitalization; Efficient allocation; Equity;
‘should’ and will exist if that use is the most Excise tax; Fiscal differential; Fiscal equaliza-
valuable use of the resource under the postulated tion; George, H.; General equilibrium;
circumstances. And compensation may or may Harberger, A.C.; Hamilton, B.W.; Head tax;
not be required to the erstwhile ‘owner’. The Housing market; Interurisdictional competi-
principle underlying such a legal principle seems tion; Land tax; Land use zoning; Local gov-
straightforward and consistent with principles of ernment; Local public finance; Mieszkowski,
efficient economic behaviour. It suffices for pre- P.; Partial equilibrium; Profits tax; Progressive
sent purposes merely to call attention to this and regressive taxation; Property taxation;
aspect of economic efficiency underlying the law. Property tax limitations; Returns to capital;
Tax incidence; Tiebout, C.; Tiebout model;
Underprovision of public services; User fees
See Also

▶ Clubs JEL Classifications

▶ Coase Theorem H2; H3; H4; H7
▶ Common Property Resources
▶ Fisheries Property taxation of both residential and non- P
▶ Law, Economic Analysis of residential land and structures – or ‘real
▶ Property Law, Economics and property’ – is the most common form of wealth
▶ Taking (Eminent Domain) taxation worldwide, and is often the revenue
instrument of choice for local governments. For
example, in the United States property taxes
account for over 70 per cent of local own-source
tax revenues. Property tax liability is calculated as
Property Taxation the product of the statutory rate and the assessed
tax base, subject to a variety of adjustments, such
George R. Zodrow as partial exemptions for primary residences and
‘circuit breakers’ designed to reduce tax burdens
for certain groups, especially relatively poor
elderly homeowners. Although vagaries in the
Abstract assessment process have long been a source of
Property taxation of both residential and non- inequity in the administration of the tax, recent
residential land and structures is the most com- advances in computer-based assessment practices
mon form of wealth taxation worldwide, and is have mitigated this problem. More recently, rapid
often the revenue instrument of choice for local growth in residential home values and the