#11551 - The Role Of Property Rights In Economic Growth

THE ROLE OF PROPERTY RIGHTS IN ECONOMIC GROWTH

Howard Demsetz—Theory on Property Rights
1. Property rights arise when the benefits of internalization exceed its costs(policing)—Montagne Indians first started claiming individual rights to hunting grounds by blazing trees with their crest in response to European fur trade, which made benefits of internalization high. Increase in beaver fur price had led to overhuntingindividual rights to hunting in certain areas.
2. Private ownership reduces, but does not eliminate, transaction costs (easier to negotiate with one person than with 1000 over land use)
3. Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner’s private rights
4. One primary function of property rights it to guide incentives (tragedy of commons, tradable fishery quotas)
5. Demsetz three conditions (which are never really met)
  1. All property rights are assigned
  2. No transaction costs of
    1. Trading
    2. Enforcing / policing
  3. Everyone is rational utility maximizer. Only works if you can monetize everything and include everything on utility curve.
  4. Changes in the distribution of wealth do not affect demand patterns.
Development / Economic Growth Theorists
1. Knack and Keefer—security of property rights and efficiency w/ which govt manages the provisions of public goods are significant determinants of the rate at which an economy grows; institutions that protect property rights are indispensible to investment
2. Shihata (World Bank on essential elements of governance)—Certain conditions are needed for a stable business environment and stable modern state. Stability and predictability are essential to the success of investment
  1. Set of rules which are known in advance
  2. Rules actually enforced
  3. Procedures to allow for departure from rules or amendment of rules when necessary
  4. Conflicts in application resolved by binding decisions of independent arbitral body
  5. BUT PROF: Maybe stability is not what we’re after. Economic growth almost inherently requires INstability. But we do want some predictability and some semblance of fairness and process (even if just through the Communist party in China) for destroying property rights when its in the interests of economic growth.
3. De Soto—Costs of Absence of Good Law and Security of Property Rights in Informal Peru
  1. Formal economy is designed to favor the propertied classes; but informal economy not necessarily bad--might be an escape hatch from underdevelopment—
    1. System rewards not creativity or competition, but connectionsleads to inefficient use of resources, wasteful allocation to bureaucratic activities and pandering
  2. Three key elements that a system of law provide (and that informals lack): property rights, contracts, and extracontractual legal system
  3. Informals don’t use or preserve resources as efficiently as they might if they had rights. They don’t invest in homes b/c they can’t rely on receiving the benefits of investment. Reduction in aggregate investment
  4. Informals cant transfer property easily, cannot use it for collateral or transfer it to higher-value uses. Less mobility of capitallower productivity.
  5. Informals incur substantial costs in defending their possession and satisfying the need for public property by establishing and operating thousands of different organizations.
    1. Informals lack administrative and levying mechanism to develop and pay for collective projects lie roads and sewer systems. A sovereign could just tax and spendinformals invest in movables like TV’s rather than roads.
Distinction between tort and property rights
1. In Tort (nuisance) you get damages. Often the case with nuisance
2. In property, you get an injunction. Sanderson would’ve had right to injunction against coal company if the court hadn’t changed the doctrine.

Substance	Doctrine	Description	Case	Policy Rationale
Light	Absolute Ownership (the common law rule until Prah)	Property owners owns everything above and below; no one else has any rights to light or air; Replaces ancient stopping of lights doctrine whereby you had prescriptive easement once you've enjoyed use of sunlight for 20 years.	Parker & Edgerton v Foote: D had owned land and had sunlight through his window for 20 years, before P builds a store on his land that blocks the sunlight from reaching P's window. P sues under ancient doctrine of “stopping the lights.” Narrow holding, court says D has no legal right to light. If he did, by adverse use, then it would mean that D loses absolute ownership of his land merely by not building on it. That would be ridiculous.	Court wanted to encourage economic development
Light	Reasonable Use	Property can be used up til a point at which it interferes with the use of a neighbor. There’s some balancing of interests here.	Prah v Maretti: Prah had solar heating system on roof, asked Maretti when he was building his house not to interfere. They tried to come to contractual arrangement, but no agreement. Nuisance law IS applicable here. Court remands for nuisance balancing test. Compliance w/ zoning regs does not per se make conduct reasonable Courts should not implement obsolete policies (absolute ownership) that have lost their vigor over the course of years Dissent sees this more as destruction of Maretti’s property rights. Takes away major sticks in his bundle, and will affect resale value.	Energy independence; Dissent says this deprives Maretti of significant economic value of his land, he didn't have notice of this possibility when he bought it; The need for development of land is not as great then as it was under Parker; energy independence more important
Water	Natural Flow	Riparian owners have right to use the water, so long as they don’t disrupt its “natural flow.” No liability when D acts in the ordinary manner incident to mining (if that’s the natural use of the land) and exercises due care	This is what the Sanderson case is officially using, saying they’re using, but they at least implicitly put a reasonable use limit on it. But they say his use of the coal in polluting the water is reasonable, since it’s the interest of Pennsylvania in having a coal industry balanced against the rights of one little old lady (Sanderson)
	Reasonable Use	Each riparian proprietor is to make such use of running water as to do as little injury to those below as is reasonable and consistent with the valuable benefit to himself. Similar to nuisance in that there’s a balancing test, but it’s not nuisance. Evans court uses natural/artificial distinction as one way of defining reasonability, but this is just one definition used in one case by one court, not necessarily the only definition. Drinking and bathing water are probably essential. Anything necessary for survival is essential. Things just enrich comfort or wealth are not essential. But in some hot, arid climates (not here, says the court, irrigation might also be essential)Unlimited use for natural uses (drinking bathing, water for cattle); for artificial uses (e.g., machinery and irrigation), must use water so as to leave enough for lower proprietors to whom use is essential. Where water is scarce, no artificial use allowed. Question of how much is reasonable is for jury.	Evans v Merriweather: Evans' workers build a dam, which disrupts flow to Evans' land downstream, forces him to close his mill. Court says Evans' must have either told his workers to ignore his earlier instructions to not build the well, or at least must have acquiesced in their...

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