Property Rights, Transaction Costs, and the Limits of the Market
49 Pages Posted: 23 Oct 2017 Last revised: 31 Aug 2020
Date Written: August 29, 2020
To clarify the determinants and interaction of property rights and transaction costs, I study the design of the legal protection of either a good whose consensual transfer entails a transaction inefficiency or an upstream firm's input whose random cost is unverifiable and ex ante non-contractible. More disperse traders' valuations and larger odds that the upstream party can appropriate the quasi-rent induced by contract incompleteness produce more severe transaction inefficiencies and larger incomplete contracting costs, respectively. Larger transaction costs, in turn, induce weaker property rights because of the trade-off between inefficient exclusion from trade/innovation and expropriation. These implications survive when some transactors have more political influence on institutional design, or I consider the disincentive effect of weak property rights. Furthermore, they are consistent with the interplay among proxies for the availability of technological progress, severity of transaction costs and strength of property rights for 139 countries observed between 2006 and 2018.
Keywords: Property Rights; Transaction Costs; Preferences Dispersion; Innovation
JEL Classification: D23; D40; K11; O12
Suggested Citation: Suggested Citation