Private and Public Ordering in Property

Benito Arruñada (Pompeu Fabra University)

Abstract: This paper traces to Coase (1960) the theoretical roots of the difficulties faced by most economic analyses of property rights in their attempts to enlighten policymaking in the property area. In his pioneer analysis of externalities, Coase relied on a simplified conception of property that has been suitable for successfully analyzing many important issues. However, its implicit assumption that exchange in property rights does not affect future transaction costs provided an inadequate basis for understanding property institutions. From a market perspective, the central problem of property lies in the interaction among multiple transactions, which causes exchange-related and non-contractible externalities. To contain them, additional mandatory rules and a wider scope of impartiality are necessary. Their absence is felt in three attitudes closely linked to the application, out of context, of the original Coasean simplification of property: emphasizing the initial allocation of property rights, paying scant attention to legal rights, and overestimating the power of private ordering. These have been obscuring key policy choices in the areas of land titling, business formalization, administrative simplification and organized financial exchanges.