Protecting Property Rights Versus Enhancing Reliance on Contracts: The Case of the Good-Faith Purchaser

Abstract:     
A key set of institutions are those embodying society's relative concern for property rights protection vis-a-vis the enhancement of reliance on contracts, given that both can result in value mis-allocation when the scope for trade is limited and immoral intermediaries use coercion. Different societies, indeed, provide different ex post solutions to the conflict arising between an original owner and a good-faith buyer of a good transferred through coercion and, in particular, theft. We show that legal systems tend to condone transfers occurred through theft when buyers value the good more than original owners and reverse them otherwise. In the former case, which is most likely, there are separating equilibria in which moral intermediaries signal their proper title by charging prices higher than those set for stolen goods by immoral intermediaries. Hence, the extent of protection of the owner will comparatively increase (decrease) with the share of moral intermediaries (quality of the legal system) because of the lower probability of theft (impact of public enforcement). Instrumental variables estimates based on a cross section of 77 jurisdictions are consistent with this prediction.

Number of Pages in PDF File: 42

Keywords: Property Rights, Contracts, Culture, Public Enforcement, Good Faith.

JEL Classification: P14, L11, Z10, K11

working papers series