Effective Property Rights and Legal Conflict

Abstract: A large literature assumes that when an impersonal property regime with clear rules and enforcement power exists, trades will be enforced by this authority according to the specified rules. This abstracts away from the fact that property regimes are not omniscient, and thus cannot achieve this allocation; rather, they allocate property according to a second set of rules that prescribe the means by which rights may be asserted in litigation. We build a simple game-theoretic mode to examine the implications of the fact that, even in societies whose property regimes have clear rules and substantial enforcement capacity, effective property rights are determined by conflict. The model treats as active choices whether to attempt to trade, whether to cheat, whether to litigate, and how much to expend in the effort to win the case. Beyond the anticipated result that these regimes are vulnerable to the same distortions that exist in “states of nature,” we obtain novel results: We find that economic specialization improves a property regime’s effectiveness in correctly allocating disputed resources, decreasing property expropriation. This suggests that effective property regimes not only promote specialization, but may actually require some level of specialization to develop. We further find that factor markets may relate to each other in unexpected ways: Rather than all markets benefiting from a more effective property regime, as is conventionally assumed, an increase in a labor market’s efficiency may undermine efficiency in other factor markets by making conflict over capital resources more appealing. Thus the relationship between a state’s property regime and its markets may be more nuanced than previously thought.