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    4 views7 pages

    1 Property Rights Model

    Uploaded by

    Yodtoshdlw Geez

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    © All Rights Reserved
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    of 7
    IL eee Introduction: The property rights model In the slave societies of the American South and of the West Indies, slaves persistently ~ albeit rarely ~ bought their contracts from their owners in Prder to redeem themselves from slavery. In these societies, as in others, the law afforded owners nearly absolute rights over their slaves and iranted the slaves themselves no legal rights; consequently slaves were fot legally entitled to own the property necessary for self-purchase. There was no legal barrier or authority to stand in the way of owners’ owning both slave and freedom money. Nevertheless, self-purchase whereby slaves acquired property zights to theie own labor did occur. ‘Because transacting is costly, as an economic matter property ri never fully delineated. In the case of slaves, even though they were le their owners’ property, owners had to spend resources to induce their Slaves to produce, and even then slaves seldom produced to their ultimate capacity. ‘Thus slave ownership itself was never absolute, despite the Siaves lack of legal protection, Owners were able to enhance the value of their property through granting slaves some ownership rights in exchange for serices the owners Valued even more. Hence slaves were owners 100, and could on oceasion buy their freedom. As elaborated upon in Chapter 6, the stady of property rights and of the costs of transacting can yield an explanation of why slaves were able to buy their freedom; such explana tions may be tested against the facts. The property rights model I develop in this book can provide explanations of an array of such arrangements, Wwhich standard economic theory cannot successfully address, from ident fying the reasons behind the choice between wage and pieceate con- tract to pinpointing the conditions under which charity is more efficient than profitseeking behavior. ‘in the remainder of this chapter I shall define “property rights” and sketch the framework to be used in this book. In Chapter 2 the examina. tion of the gasoline shortage in the 1970s illustrates the usefulness and jmportance of the property rights framework and familiarize the reader Economic analysis of property ri With its mechanics. Chay a recapitulates, HE INHERENT DIFFICULTY OF DELINEATING RIGHTS FULLY Property rights of individuals over assets consist of the righ, oF th owers, to consume, obtain income fr nate theat ane, Obs Tee kaon obtain income fom, and alienate thse ass Ob ig in ing assets require exchange; exchan bs mutual coding of righ. Legal nights Beate oie Tights, but the former are neither necessary nor sufficient forthe exvtonee the las. The ight people hare aver abc including themselves od ather people) aze noe constant; they area function of their own dnec ctlomsat protection of other people's cpnure tempts, and of gorers iment protection. The last condition is effected primarily throwgh the police and the courts." Squares rights co the land they occupy a le Teas an hose of egal owners nor becase the ack dds bt beease rotection is expected for such holdings. As defined here, Propet right are not absolute and can be changed by india se ns; such a definition, then, is us resource aloes: om ch denon hen the analysis of resource alloca. to lure to exploit the property rights ee ana of bev it tendency to consider ‘The concept of px rf of property rights is closely related to that of ee one transaction costs as the costs Seosiated ath eatin cqptre and proteeon of right It asmed that for any ase eh is csing and that both the fll proecuon sal te fa ly costly, then it follows th follows that rights are never find it worthwhile to gain the de that the right to an coer complete delineated, both ts owner and other individuals Potentially intrested in the asset must posies fll knowledge of raed roger knowledge, the transfer of rights to an aso can fe rally elected. Conversely, when rights are petty denetes, Brod ion must be costless to obtain, and the (re 3 ransacting must then be zero. ° a "The distinction spell incon sometimes made bere propery ih ‘popu Human igh ar simply pre of popes prope toh ener rotect OF exchange, but ve are Achian and Ales (97, pease) ee te, becau se people of “their” asset complete, or be perf The property rights model “When transaction costs are positive, rights to assets cannot be perfectly delineated. The attributes of such assets are not fully known to prospec- tive owners and are often not known to the current owner either. The transfer of assets entails costs resulting from both parties’ attempts t0 Uetermine what the valued attributes of these assets are and from the Srempt by each to capture those attributes that, because ofthe prohibi- ‘emain poorly delineated." Exchanges that otherwise would be tractive may be forsaken because of such exchange cost. stration of the costiness of exchanging rights an location stems from the draft of college football players by the ‘Nasional Football League (NFL). Drafting is the acquisition by one team of the exclusive negotiation rights for the services ofa player, inclusive of the righe to transfer to any NFL team. Every year, the twenty-eight NFL teams select eligible college players in a predetermined sequence. It would teem that the team with the right to, say, the twentieth selection would Select the player among those not yet drafted who is most valuable to of the teams. Given the diversity of both players and teams, the probabi ity thatthe team with the-righe to the ewentieth selection will also be the ue placing its highest value on any of the remaining players isthe same ge any other team’s, that is, one in twenty-eight. Were the costs of ex Change among teams low, the probability of that player’s being traded vould then be twenty-seven in twenty-eight. The observed trading fre- (quency of newly drafted players, however, is much lower than 2 low Ganwzction cost model predicts. This cost of transacting, at least, does sacting? What are the factors that ue of their assets? Commodi have many attributes whose lev sm one specimen of acomm« to another. The measurement of these levels is too costly to be comprehen Siveor entirely accurate. How difficult sto obtain full information in the face of variability fundamentally determines how di rights, Because itis costly ro measure commodities fully the potential of ‘wealth capture is present in every exchange. The opportunity for wealth Caprure is equivalent to finding property in the public domain; in every exchange, then, some wealth spill over into the public domain, and indi- Giduats spend resources to capture it. Whereas people always expect t0 gain from exchange, they also always spend resources on capture. Individu- ize their expected) net gains, the gains from exchange as conven- perceived net ofthe cost of effecting exchange. “The sale of cherries illustrates the phenomenon of wealth capture. - mation present themselves when cherries are prevent people from reali Obvious problems of inforr “Similar considerations, not elaborated on here, apply 10 the protection o 3 Economic analysis of property rights exchanged. Customers must spend resources in order to determine whether a store’s cherries are worth buying and in order to determine which particular cherries to buy. Store owners who allow customers to pick and choose cannot easily prevent them from eating cherries after they have already decided whether or not to buy them, nor can they prevent customers’ careless handling of cherties. Indeed, the process of picking and choosing itself allows wealth capture in the form of excess choosing.’ Some of the cherries’ attributes, then, are placed in the pul domain. The high cost of information results in transaction costs: costs that would not arise were the owner and the consumer of cherries the same person. If information about the cherries were costless, thei initial owner would not have to relinquish any rights; and pilfering, damage, and excess choosing would be avoided. In reality, such public domain problems are unavoidable; people can take steps, however, to reduce the associated losses. DIVIDED OWNERSHIP OF COMMODITIES Net gains from exchange can often be increased if the original owners of commodities transfer only subsets of the commodities’ attributes and retain the rest. Exchange that takes this form results in divided property rights for single commodities: Two or more individuals may own distinct attributes of the same commodity. As elaborated in Chapters 4 and 7, restrictions on the owners’ behavior may be imposed in order to enhance the separation of their individual rights. Incomplete separation makes attributes common property, relinquishing them to the public domain; if they are in the public domain, resources are spent on their capture. Not only is ownership of commodities often divided; ownership’ of ‘organizations may be divided as well Physical operations within, and on the fringe of, an organization such as a firm usually involve many com- ‘modities and correspondingly many attributes. Several individuals share in ownership of the attributes, each owning alone, or with others, some subset of these. Stockholders own some of these attributes, but definitely of them. For instance, a firm (or, more accurately, its stockhold- t has a service contract for a copier to which it has the title does lly own the copier. The firm is not the only party that gains when Il and loses when it does not. The service supplier ing operation, gaining if it provides good service and losing if the service is poor, and is thus part owner of the Bacal (2982) ‘Alchian (2965) recognizes that ownership of commodities and of organiations tzay be divided. Posner (1986) diacuses property sights and notes that owcrhip can be divided. Propessy re ° 4 The property rights model le for certain damages to use the copier in practice, they too, restrictions may ier manufacturer is copier. In addition, the copier manu Caused by the copier, and employes who rivately without charge are also part owners Pave a claim on some of the copier’s ouput. He serve to separate rights and prevent free that such Festrictions do not necessarily atten may enhance them. FACTORS THAT AFFECT THE ALLOCATION OF OWNERSHIP ct are a part of to secrve the income flow generated by an aset are @ part ‘The hs fights over that asset. The greater i others’ inclinato te 2S of tans, the lower is the vale of he ait. The mai tion of the net value of an asset, then, involves por owner hip pattern that can most effectively constrain uncompensated exp/Cr9, ion. The kind of ownership pattern to emerge depends on cof such assets : sade ea snerating a flow of service ace relatively The ihe Tr can be realy ascertained, Decause i is e0 oe jel of service exchanged. There- Sapose a charge commensurate with the level of ange Thee, flow is known and constant, it is fos a enn she Gow is variable bas aly predic a cong to ensure, a they ae ifthe low is not certain but

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