Endogenous Property Rights

Abstract: Albeit the relevance of property rights is well documented, their determinants are still poorly understood. Because of transaction costs, societies solve a trade-off between private expropriation and value misallocation. Stronger property rights enhance voluntary transfers and hence limit value-misallocation but shrink the consumption set of low-valuation buyers who can consume only through expropriation. Thus, the strength of property rights will rise with factors limiting consumption by middle-valuation buyers and fostering private expropriation by low valuation buyers, e.g., preference heterogeneity. This prediction is consistent with instrumental variables estimates based on a novel cross-country dataset on the rules regulating government takings of real property and adverse possession of personal property.