Informational Asymmetries in Informal Property Systems: A Theoretical Model
26 Pages Posted: 28 May 2010
Date Written: May 28, 2009
This article presents a theoretical model for mapping the impact of informational asymmetries in informal property systems. The foundation of this model is Akerlof's 'lemons' market - a market where asymmetric information has the potential to lead to market failure where trades within the market cannot take place at any price. An informal property system presents an analogous situation, but where others have confined their assessment of such markets to an analysis of asymmetries in the knowledge of structural and latent characteristics, the instant article posits a third class of information that ultimately may determine whether or not transactions will take place - the legal attributes of the property. These attributes include titling requirements and adequate access to dispute settlement mechanisms. Asymmetries in information on the legal attributes of a property will most likely be manifest only in outsiders to any given system. Within the system, the informal structure is largely community based. Thus, while the informal system may be highly efficient and be backed by its own form of dispute settlement mechanisms, the lack of adequate legal protections or, at the very least, gross uncertainty as to the legal status of any property, is a severe impediment to development and the injection of capital into depressed and impoverished regions. Without adequate institutional and structural safeguards, including some form of legal, recognized title, the nature of an informal property system may be a significant barrier to much needed local investment.
Keywords: Akerlof, lemons market, durable goods markets, formal and informal property systems, titling requirements, foreign investment
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