Imperfect Property Rights: The Role of Heterogeneity and Strategic Uncertainty

Abstract

Property rights are undoubtedly among the most important institutions for economic efficiency. Still, by looking at reality we usually see property rights only imperfectly enforced. In this paper we identify uncertainty faced by an enforcer to be sufficient to explain this observation. This result is independent of the enforcer's risk preferences or enforcement ability. While perfectly enforced property rights may readily be established in all possible scenarios under complete information, introducing any amount of exogenous uncertainty leads to imperfect enforcement. Further, even under complete information, we show how an appropriator may create uncertainty endogenously by means of strategic restraint. Although this means that appropriation is always possible, this situation Pareto dominates perfect enforcement.

Keywords: Information, Conflict, Property Rights

JEL Classification: D02, D23, D74, D82