Economic History Association

The Property Right Paradigm

Author(s): Armen A. Alchian and Harold Demsetz
Source: The Journal of Economic History, Vol. 33, No. 1, The Tasks of Economic History
(Mar., 1973), pp. 16-27
Published by: Cambridge University Press on behalf of the Economic History Association
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 The PropertyRightParadigm

INTRODUCTION

ECONOMICS textbooks eco-

describethe important
invariably
nomicchoicesthatall societiesmustmakeby the following
threequestions:Whatgoodsare to be produced?How are these
goodsto be produced?Who is to getwhatis produced?This way
ofstatingsocialchoiceproblems is misleading.Economicorganiza-
tionsnecessarilydo resolvetheseissuesinonefashion oranother, but
even themostcentralized societiesdo not and cannotspecifythe
answertothesequestions in advanceand in detail.It is moreuseful
and nearerto thetruthto viewa socialsystemas relying on tech-
niques,rules,or customsto resolveconflicts thatarisein theuse of
scarceresourcesratherthanimaginingthatsocietiesspecifythe
usesto whichresources
particular willbe put.
Sincethesameresourcecannotsimultaneously be used to satisfy
competing demands,conflicts of interest willbe resolvedone way
ortheother.The arrangements fordoingthisrunthefullgamutof
humanexperienceand include war, strikes,elections,religious
authority,legal arbitration, exchange,and gambling.Each society
employsa mixof such devices,and the difference betweensocial
organizationsconsists largelyin theemphasistheygiveto particular
methodsforresolving thesocialproblemsassociatedwithresource
scarcity.
Capitalism reliesheavilyonmarkets andprivateproperty rightsto
resolveconflictsovertheuse ofscarceresources. Thesefundamental
of an idealizedcapitalistic
characteristics systemhave been taken
forgrantedby mostmainstream economists even thoughthe dis-
ciplineof economicsdevelopedcontemporaneously withWestern
stylecapitalism.It is unfortunate thatthestudyoftheunderpinnings
ofcapitalism has beenleftby defaultto itscriticson theleft.
Butrecentyearshavewitnessed increasing to thesubject
attention
ofproperty rightsand to thebeginning ofa somewhat differentap-
poach to the analysisof socialproblemsthatfindtheirsourcein
foraid is made to the E. LillyEndowmentInc. grantto
Gratefulacknowledgement
the EconomicsDepartment,U.C.L.A. forresearchon behavioraleffectsof different
propertyrights.
16

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 PropertyRightsParadigm 17
Threequestionsare suggestedby thisgrowingliterature:
scarcity.
(1) Whatis the structure rightsin a societyat some
of property
pointof time?(2) Whatconsequencesforsocial interaction flow
froma particularstructure rights?and, (3) How has
of property
thispropertyrightstructurecomeintobeing?Economichistorians
can contributeverymuchto overcoming our ignoranceaboutthe
answersto thesequestions,and our purposehere is to facilitate
researchon theseproblemsby clarifying
historical somewhatthe
contentofthesequestions.
THE STRUCTURE OF RIGHTS

In commonspeech,we frequently speakof someoneowningthis

land,thathouse,or thesebonds.Thisconversational styleundoubt-
edlyis economical fromtheviewpoint ofquickcommunication, but
it masksthevarietyand complexity of the ownership relationship.
What is ownedare rightsto use resources, includingone's body
and mind,and theserightsare alwayscircumscribed, oftenby the
prohibition ofcertainactions.To "ownland"usuallymeansto have
therighttotill(or nottotill) thesoil,tominethesoil,to offer those
rights forsale,etc.,butnotto havetherightto throwsoilat a pas--
serby,touseitto changethecourseofa stream, ortoforcesomeone
to buyit. Whatare ownedare sociallyrecognized rightsof action.
The strength withwhichrightsare ownedcan be definedby the
extentto whichan owner'sdecisionabouthow a resourcewill be
used actuallydetermines theuse. If theprobability is "1" thatan
owner'schoiceofhowa particular rightshouldbe exercised actually
dominatesthe decisionprocessthatgovernsactualuse, thenthat
ownercan be said to own absolutelythe particularrightunder
consideration. For example,a personmayhavean absoluterightto
pickapplesoffa tree,butnottoprunethetree.
The domainof demarcated uses of a resourcecan be partitioned
amongseveralpeople.Morethanone partycan claimsomeowner-
shipinterest in thesameresource. One partymayowntherightto
tilltheland,whileanother, perhapsthestate,mayownan easement
to traverse or otherwise use thelandforspecificpurposes.It is not
theresourceitselfwhichis owned;it is a bundle,or a portion, of
rights touse a resource thatis owned.In itsoriginalmeaning, prop-
ertyreferred solelyto a right,title,or interest,
and resources could
notbe identified as propertyanymorethantheycouldbe identified
as right,title,orinterest.

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18 A. Aichian; H. Demsetz
Distinctfromthepartitioning of the domainof uses to whicha
resource maybe putis thedecisionprocessthatmaybe reliedupon
todetermine thatuse: The exerciseofa particular rightmaydepend
on a decisionprocessin whichmanyindividuals share,such as in
theuse ofmajority voting.The rightto votemaybe exercised indi-
vidually,butit is thepatternofvotesby manyindividuals thatde-
termines thewayinwhicha righttouse a resource willbe exercised.
Thereare twoimportant questionsthatcan be askedaboutthe
structure ofproperty rightsin a society.The first askswhichprop-
ertyrights exist.Theremayexista particular rightofuse in a society
thatdidnotexistearlierorthatdoesnotexistin othersocieties.For
example,earlyin thehistory of radio,usersof frequencies did not
own therightto preventmembersof the community frombroad-
castingon thesesameradiofrequencies. Anypersonwhowishedto
couldbroadcaston any frequency, and thatis stilltruetodayfor
certainbandsofradiofrequencies. The rightto offer heroinforsale
on theopenmarketdoes notexistin theUnitedStatesalthoughit
mayin othercountries. The rightto advocateparticular political
doctrinesexistsin greater degreeintheUnitedStatesthanin Russia.
(It shouldbe notedthattherightto advocateis a rightto use re-
sources,forno advocacycouldtakeplacewithouttheuse ofa place
andotherfacilities.)
The secondquestioncallsattention to thefactthattheidentity of
rightownersmayvary.Perhapsthemostimportant ownership dis-
tinctionis betweenstate(public) ownership andprivateownership.
An easementrightmaybe ownedby thestateor by an individual.
The rightto deliverfirst classmailis ownedby thestate,whereas
therighttoboardtroopswithout permission is not.Needlessto say,
theclassification of socialsystems accordingto the degreeof cen-
tralizationofcontrol is closelyrelatedto thedegreeto whichprop-
ertyrights areownedexclusively bythestate.
Thereis someambiguity inthenotionofstateorprivateownership
ofa resource, becausethebundleofproperty rightsassociatedwith
a resourceis divisible.Therecan and does existmuchconfusion
aboutwhether a resourceor "property" is stateor privatelyowned.
Somerightsto someuses of theresourcemaybe stateownedand
othersprivately owned.Whileit is truethatthedegreeof private
controlis increasedwhenadditionalrightsof use becomeprivately
owned,it is somewhat arbitraryto pass judgment on whenthecon-
versiontoprivatecontrol canbe saidto changetheownership ofthe

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 PropertyRigfhts
Paradigm 19
ofowners
bundleofrightsfrompublicto private.The classification
can be carriedbeyondtheimportant stateand privatedichotomy.
Corporate,school,andchurchownersofproperty arealsoofinterest.
The structure consequences
ofrightscan haveimportant fortheal-
someofwhichwe nowillustrate.
locationofresources,

THE SOCIAL CONSEQUENCES OF THE STRUCTURE OF RIGHTS

The significance ofwhichrightsexistcan be appreciated by con-

trastingsituations in which thereis and is nota right to exclude. We
shalluse thephrase"communal rights"to describea bundleofrights
whichincludestherightto use a scarceresource butfailsto include
therightof an "absenteeowner"to excludeothersfromusingthe
resource.Operationally thismeansthattheuse ofa scarceresource
is determined on a first-come, first-servebasisandpersists foras long
as a personcontinues to use theresource. The use ofa citysidewalk
ora "public"roadis communal, andtherights totillorhunttheland
have been subjectedto thisformof ownership frequently. Often
communal ownership is technicallyassociatedwithstateownership,
as in thecase ofpublicparks,whereinthestatetechnically has the
capabilityofexcluding personsfromusingitsproperty. If thisright
is exercisedby thestatefrequently, as it is on militaryreservations,
thentheproperty rightis moreproperly identifiedas stateowned,
but if therightto excludeis seldomexercisedby the state,as in
publicparksor thoroughfares, thenas a practicalmattertheusers
of theresourcewill treatit as communal. Communalrightsmean
thattheworking arrangement fortheuse ofa resourceis suchthat
neitherthe statenor individualcitizenscan excludeothersfrom
usingthe resourceexceptby priorand continuing use of the re-
source.The firstdriverto enterthepublicroadhas a rightof use
thatcontinues foras longas he uses theroad.A seconddrivercan
followthefirst butcannotdisplaceorexcludehim.
The difficultywitha communal rightis thatit is notconduciveto
theaccuratemeasurement of the costthatwill be associatedwith
anyperson'suse oftheresource. Personswhoowncommunal rights
willtendto exercisetheserightsin waysthatignorethefullconse-
quencesof theiractions.For example,one of the costsof hunting
animals,iftheyare notsuperabundant, is theresulting depletionin
thesubsequent stockofanimals.Thiscostwillbe takenintoaccount
onlyifit is in someone'sinterest to do so. Thisinterest Is provided

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20 A. Aichian; H. Demsetz
ifsomeonecan layclaimto orbenefit fromtheincreasein thestock
of animalsthatresultsfroma curtailment in his huntingactivities.
Undera communal rightsystemanyonewhorefrains fromhunting
doesso notto hisbenefit butto thebenefit ofotherswhowillcon-
tinueto exercisetheircommunal rightto hunt.Each person,there-
fore,willtendtohuntthelandtoointensively and depletethestock
ofanimalstoorapidly.
Oftentheexerciseofcommunal rightsforcespersonsto behavein
ways that are thoughtto be immoral.In 1970, the newspapers
carriedstoriesof the barbaricand cruelannualslaughter of baby
seals on the ice floesoffPrinceEdwardIsland in the Gulfof St.
Lawrence.The Canadian government permittedno more than
50,000animalsto be taken,so hunters workedwithspeedto make
theirkillsbeforethe legal maximum was reached.Theyswarmed
overice floesand crushedthebabies'skullswithheavyclubs.Gov-
ernment officesreceivedmanyproteststhatthe seals were inhu-
manelyclubbed(by humans)and oftenskinnedalive.The minister
offisheries warnedthehunters ofthestrongpressure he was under
to ban thehuntand thathe woulddo so unlessthekillingmethods
werehumanein 1970.Clearly, itis notthehunters whoaretoblame
buttheregulations governing seal hunting thatimposea communal
rightto hunton huntersuntil50,000baby seals have been taken.
The first 50,000animalsare offered freeon a first-come, first-serve
basis,a rationing systemthatis boundto encouragerapidhunting
techniques and to makea condition forsuccessthedegreeto which
thehunter canbe ruthless.
The problemsposed by communalrightsare abundantly clear
whenwe analyzethecausesofpollution. Sincethestatehas invited
its citizensto treatlakesand waterways as if theyare freegoods,
thatis, sincethestategenerally has failedto excludepersonsfrom
exercising communal rightsin theuse of theseresources, manyof
theseresources havebeenoverutilized to thepointwherepollution
posesa severethreatto theproductivity oftheresource.
An attenuation in thebundleofrightsthatdisallowsexchangeat
market clearingpriceswillalsoaltertheallocationofresources. The
interests pursuedby menare bothvariedand many.If a priceceil-
ingor pricefloorprevents ownersfromcatering to theirdesiresfor
greaterwealth,theywill yieldmoreto the pursuitof othergoals.
Forexample, effective
rentcontrol encourages ownersofapartments
to lease themto childlessadultswhoare lesslikelyto damagetheir

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 PropertyRightsParadigm 21
livingquarters. Effectiverentcontrolalsoprompts landlords to lease
theirapartments to personspossessing personalcharacteristics that
landlordsfavor.In a Chicagonewspaper, thepercentage of apart-
mentforrentadvertisements specifyingthattheapartment was for
rentonlyon a "restricted" basisor onlyif therenterpurchasedthe
furniturerosefroma pre-warlow of 10 percentto a wartimehigh
of90 percentduringtheperiodofWorldWarII whenrentcontrol
effectivelycreatedqueuesofprospective renters.
Attenuations in the
rightto offer forsale or purchaseat marketclearingpricescan be
expectedto givegreateradvantagesto thosewho possessmoreap-
pealingracialorpersonalattributes.
The reallocation of resourcesassociatedwiththe absenceof a
rightto excludeand the inabilityto exchangeat marketclearing
pricesis attributable to the increasein the cost of transacting
brought aboutby thesemodifications in theproperty rightbundle.
A pricefixing law raisesthecostofallocating resources vis-A-visthe
pricemechanism and,therefore, forcestransactorsto place greater
relianceon non-price allocationmethods.This is obvious;but not
equallyobviousis theroleplayedbytransaction costwhentheright
to excludeis absent.
Considertheproblemof congestion duringcertainhoursin the
use offreeways. No one exercisestherightto excludedriversfrom
usingfreeways duringthesehours.The rightto driveon freeways
is a communal right.But drivers whodesireless congestion are not
legallyprohibited frompayingothersto use alternative routesdur-
ing thesehours.Thisrightsystem, however,encouragesdriversto
let someoneelse pay personsto use alternative routes,sincethose
whodo notpaycannotbe excludedfromtheuse ofthefreeway un-
der a communalrightsystem.The communalrightsystemraises
transaction costby creating a freeriderproblem.Moreover, evenif
sometemporary reductionin congestion is purchased, theremaybe
manypersonsnotnowusingthefreeway whoare attracted to it by
thetemporary reductionin congestion.The supplyoffreeway space
is verylikelyto createa demandforits use underthe communal
rightsystem becausethesenewuserscannotbe excluded.Theyalso
mustbe paid to returnto alternative routes,and thisburdensthe
allocationsystem withadditional costlytransactions.A rightsystem
thatincludestherightto excludenonpayers, suchas is possiblewith
eliminates
tollroads, boththesesourcesofhightransaction cost.Per-
sonsnotnowusingtheroadcan use it onlyif theyvalue theroute

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22 A. Aichian; H. Demsetz
enoughto paythetoll,and theownerofthetollroadis nothandi-
cappedbythepsychology ofa freeloader.
The socialconsequences of theidentity of rightownersalso can
have allocativeeffects. At themoreobviouslevel,government and
privateowners, respectively, willrespondin greater degreetopoliti-
cal and marketincentives, and thiscan be expectedto yielddiffer-
ingresourceuses. But the effect on resourceallocationof altering
the identityof owners,all of whomare privateowners,is not so
obvious.As a firstapproximation, eachand all privateownerscanbe
expectedto respondto marketincentives in the sameway so that
theparticular identity ofownerswillnotaltertheusesto whichre-
sourcesare put. All privateownershave strongincentives to use
theirproperty rightsin themostvaluableway.Undercertaincon-
ditions,thisapproximation can be expectedto be verygood.The
mostimportant oftheseconditions is thatthecostoftransactions be
negligible;in thiscase, it will be easy forthosewho can put re-
sourcesto theirmostvaluableuses to contactand negotiatewith
thosepersonspresently owningtherightsto theseresources. If the
costoftransactions is notnegligible, thenan alteration in theiden-
tityofrightownerscan haveallocativeeffects becausenegotiations
towarda uniqueutilization of resources maybe inhibited by posi-
tivetransaction costs.
The mostimportant effectof alterations in institutionalarrange-
mentsmaywellbe theimpactofsuchreorganizations on thecostof
transacting.The enclosuremovement, forexample,mayhave sig-
nificantly
reducedthecostofcarrying on transactions amongthose
possessingrights ofuse,and thismayhaveeasedthetaskofputting
resourcesto theirmostproductive uses.Perhapssomenewinsights
abouttheconsequences oftheenclosure movement can be obtained
iftheresearcher focuseshisattention on thecostoftransacting.

THE DEVELOPMENT OF PROPERTY RIGHT STRUCTURES

Undera communal rightsystem eachpersonhas theprivateright

totheuse ofa resource
onceit is capturedortaken,butonlya com-
munalrightto thesameresource beforeit is taken.Thisincongruity
betweenownershipopportunities promptsmen to converttheir
into
rights the mostvaluableform;theywill converttheresources
ownedundercommunalarrangements into resourcesowned pri-
vately,thatis, theywill huntin orderto establishprivaterightsover

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 PropertyRightsParadigm 23
theanimals.The problemcan be resolvedeitherby converting the
communal rightto a privateright,in whichcase therewill be no
overriding need to hunttheanimalsin orderto establisha private
claim,or theincentive to convert communal rightsto privaterights
can be restrainedthrough regulation.
Thereis a basicinstability in an arrangement whichprovidesfor
communal rightsovera resource whenthatresourcetakesone form
and privaterightswhenit takesanotherform.The privateright
formwill displacethe communalrightform.In itselfthishas im-
portant consequences onlyiftheconversion ofcommunal ownership
intoprivateownership is costly.Thus,if unbrandedanimalsare
held to be communal property whilebrandedanimalsare private,
therewillbe a rushto placebrandson theanimals.Thiswouldnot
be verycostly,especiallysince brandingwould be desirablefor
identificationpurposesanyway.Therewouldbe no needto killthe
animalsin orderto establishprivaterights,so thattheseanimals
can be husbandedappropriately once the cost of brandingis in-
curred.But a conversion process thatrequiresthatthe animalsbe
killedin orderto establish privaterights mustincurthelargersocial
costofdepleting thestockofanimals.
If the social adjustment to the incongruity betweencommunal
in
and privaterightsis resolved favorof eliminating the private
right,then the immediateproblemis replacedby another-the
problemof providing incentives to work.Thus,if we supposethat
thecommunal rightto hunt is supplemented by thestipulation that
killedanimalsbelongto the community, in whichall citizenscan
shareaccordingto custom,and do not belongexclusively to the
hunter, thentheincentive tohuntwillbe diminished. Thismaycure
the overhunting problemby creatingan underhunting problemin
whichtheable-bodied waitforothersto do thehunting, theresults
ofwhichwillbe sharedbyall. In orderto reducetheseverity ofthe
shirking problemthatis thereby created,it is necessaryforsocieties
whichfailto establishprivaterightsto moveevercloserto a social
organization in whichthebehaviorof individuals is directlyregu-
latedbythestateorindirectly influencedby culturalindoctrination.
The optiontohuntornotto huntcannotbe leftwiththeindividual
who,unableto claimthefruitof his effort, will tendto shirk.In-
stead,thestatewillfindit increasingly necessary to orderthehunt,
toinsiston participationin it,andtoregulatemorecloselytheshar-
ing of thekill.Or, possibly,the community can investin cultural

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24 A. Aichian; H. Demsetz
indoctrination thatleads to an increasein thewillingness to hunt.
Thisis in factthecoursethateventshavetakenamongmanyprimi-
tivepeoples.The animalstheyhuntare"free"to all on a first-come,
first-servebasis,but thekillmustbe sharedaccordingto detailed
ritualprocedures, and the questionof participating in the huntis
notleftopento individuals. The attempt to resolvescarcity-created
problems byreducing thescopeofprivaterightsmustinevitably re-
sultin a morecentrally regulated orindoctrinated society.One need
notgo so farafieldto findthisprocessat work.Our publicschools
are offered on a "free"rightto use basis.As goodschoolsattractin-
creasingnumbersof students, the community eithermustexpand
itsresourcecommitment to publicschools,in orderto offset whatit
viewsas overutilization, or it mustsomehowregulatethe flowof
newcomers. Zoningrestrictions and buildingcodesfrequently have
beenusedtorestrict therateofimmigration intosuchcommunities.
If privaterightscan be policedeasily,it is practicable toresolve
the problemby converting communalrightsinto privaterights.'
Contrary to somepopularnotions, it can be seenthatprivaterights
can be sociallyusefulprecisely becausetheyencouragepersonsto
takeaccountofsocialcosts.The identification ofprivaterightswith
anti-socialbehavioris a doctrine as mischievous as it is popular.
The instability inherent in a communal rightsystemwillbecome
especiallyacutewhenchangesin technology or demandsmakethe
resourcewhichis ownedcommunally morevaluablethan it has
been.Suchchangesarelikelyto bringwiththemharmful andbene-
ficialeffectswhichcan be measuredand takenaccountof onlyby
incurring largetransaction costsunderthe existingproperty right
structure.In suchsituations, we expectto observemodifications in
the structure of rightswhichallow personsto respondmorefully
andappropriately tothesenewcostsandbenefits. The comingofthe
furtradetotheNew Continent had twoconsequences. The valueof
fursto theIndiansincreasedand so did thescale ofhunting activi-
ties.Beforethecomingofthefurtrade,theIndianscouldtoleratea
socialarrangement thatallowedfreehunting, forthescale ofhunt-
ingactivities musthavebeentoosmalltoseriously depletethestock

1 Alternatively,of course,the communalrightcan be convertedto a staterightin

whichthe stateseeksto exclude,perhapsby adoptinga price mechanism, the issue
raisedby statevs. privateownershipas notso muchone of whatcan be done but one
of whatwillbe done by stateowners.

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 PropertyRightsParadigfm 25
ofanimals.Butafterthefurtrade,itbecamenecessary to economize
on thescale ofhunting. The control systemadoptedby theIndians
in theNortheastern partof thecontinent was to substituteprivate
rightsin landforfreeaccessto hunting lands.By owningtheright
to excludeothersfromtheirland,Indianfamilieswere provided
withan incentiveto inventory theiranimals.Undera freeaccess
arrangement, suchinventories wouldhave been depletedby other
hunters.With privaterightsto huntthe land theseinventories
couldbe maintained at levelsmoreconsistent withthegrowing mar-
ketforfurs.
Similarly,ProfessorNorthnotesthattwelfth-century Englandex-
perienceda relativerisein thevalueoflandwhichled to efforts to
convert theexisting rightstructure intoone thatallowedforexclu-
sive ownership and transferability.2Duringthe thirteenth century,
Englandexperienced thedevelopment ofan extensive bodyofland
law, theinitiationsof enclosure, and, finally,the rightto alienate
land,and thereweresimilarexperiences on theContinent.
The relaying ofradiosignalsbetweennationsin Europeprovides
an interestingexampleof thebreadthof theproperty rightadjust-
mentthatis likelyto followfroman economically significanttech-
nologicaldevelopment. The telephone in
company Hollanddecided
in 1926thatit woulduse its facilities to relayradioprograms re-
ceivedfromoutsideHollandto subscribers in Hollandin return for
thepayment of subscription fees.However,manyof theprograms
originatingfromsuchcountries as England,France,and Germany
wereownedundercopyright, and the copyright ownerswere not
compensated by theHollandtelephonecompany.The use of a re-
sourcethatautomatically becameavailableto one country once it
was producedin anotherposedunusuallegal problemsthatled to
heatedcontroversy and to theBerneConvention in 1928.Thatcon-
ferencegave to copyright ownersthe sole rightto authorizeany
communication to thecitizensof signatory countries,whetherover
wiresornot,oftheradiotransmission ofthecopyright material. And
by 1938,in the UnitedStates,the FederalRadio Commission ap-
pearedto regardtheunauthorized relayof broadcastsignalsas il-
legal.
2 D. Northand R. Thomas,"The Rise and Fall of the ManorialSystem:A The-
oreticalModel,"JOURNAL OF ECONOMIC HISTORY, XXXI (December 1971), pp. 777-
803.

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26 a. Aichian; H. Demsetz
We havemerelytouchedon a fewcasesofevolvingstructures of
property rightsto whichsome contemporary thoughthas been
given.Thereexistverymanyproperty rightphenomena thatcould
benefitfromthoughtful attention.Considerthe problemof the
capitalstructure ofcorporations. The well-known Modigliani-Miller
theorem thatthevalueofan enterprise is independent ofitscapital
structure is a specialapplication of the assumption that thecostof
transacting is zero.Titlesof variouskindsare assignedto partsof
an enterprise's wealthand thevalueofthesetitlesare no morenor
less thanthe presentvalue of the enterprise's wealthpotential, at
least so long as entitlements are well defined,partitionable, and
transferable at zero cost. Further,theywill be revisedand ex-
changedin waysthatmaximizethe utilityof theirownersubject
onlyto theconstraint imposedby thewealthpotentialoftheenter-
prise.
But,in fact,thesebundlesofrightsare notcostlessly transferable
orrevisable, so thata questionremainsas to whatbundlesofrights
aremostappropriate foran enterprise to issueintially.Bonds,com-
monstocks,preferreds, convertibles, warrants? Giventhe cost of
transacting and of revisingthesebundlesof rights,are thereany
factors thatwouldexplaintheinitialmix?We conjecture thatdiffer-
encesin beliefsby investors aboutthepotential performance of the
enterprise can accountfordifferences in theinitialmix.An enter-
prisethatdesiresto maximizethe sum it raisesfromthe sale of
ownership claimswouldfindit desirableto offerdifferent bundles
ofrights;a warrant, forexample,to optimistic investorsand a bond
to pessimistic investors,giventhatmarketsdo not functioncost-
lessly.If themarket couldproducethesedifferent bundlescostlessly,
therewouldbe no needforthefirm to be concerned withdifferent
financial instruments. For,then,financial intermediaries couldsup-
plement andconvert anyfinancial instrument issuedbythefirm into
the mixof financial instruments preferred by optimistic and pes-
simisticinvestors who hold different expectations about the firm's
prospects.
Althougharticlesdealingwithproperty rightsand transaction
costsareaccumulating at a rapidpace,theytendto be primarily of
the"speculative theory"variety. Onlya handfulofempirical studies
havebeen concluded,a fewofwhichare concerned withphenom-
ena old enoughto be historical. Buteconomichistorians havemuch

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 PropertyRightsParadigm 27
moreto contribute,
and we hope thatwe have made someof you
curiousenoughto examinethe partialbibliography
appendedto
thispaper.
ARMEN A. ALCHIAN AND HAROLD DEMSETZ,
University
ofCalifornia,
Los Angeles
BIBLIOGRAPHICAL APPENDIX
1. A. A. Alchian,"Unemployment and the Cost of Information," WesternEconomic
Journal,VII (June 1969), pp. 109-128.
2. -2. "Some Economicsof PropertyRights,"11 Politico,XXX (1965), pp.
816-829.
3. A. Alchianand H. Demsetz,"Production, InformationCost,and EconomicOrga-
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