Academic journal article The European Journal of Comparative Economics

Are Both Dimensions of Property Rights "Efficient"?

Academic journal article The European Journal of Comparative Economics

Are Both Dimensions of Property Rights "Efficient"?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Once it is accepted that property rights security is the most important determinant of economic development, it is obvious we need to immediately raise the question, what are the most important determinants of property rights security? In this paper I will focus on one of the explanations which have been developed to answer that question, the so-called economic approach to property rights, or the efficient institutions view. The efficient institutions hypothesis is understood as the claim that economic development will create incentives for governments to provide a higher security of property rights. The empirical tests of this hypothesis are usually cross-country regressions with property rights security on the left-hand side and a measure of economic development on the right-hand side.

The paper argues that, on the one hand, property rights quality is a two-dimensional concept, because property rights should be considered as the result of two constitutional decisions: one is concerned with the definition of property rights while the other is concerned with the assignment of property rights. Definition and assignment will be considered as two dimensions of property rights quality. On the other hand, property rights in the "economic" approach must be understood in a broader sense than it usually is by the empirical papers. It must also include those rights that are considered to be in the political sphere of human actions as opposed to the economic.

The "economic approach", when carefully applied, does not imply that the one single determinant of property rights is economic development. As this view suggests that institutions are created to minimize transaction costs, culture as an important determinant of transaction costs should be considered, too. The two dimensions of property rights, however, might not equally well be determined by development and culture. We can expect that development has a greater effect on the assignment dimension while culture has a greater effect on the definition dimension. First, even if the assignment dimension is improved by economic development, the definition dimension can only be improved if economic development is based on innovation. When imitation is the main driving force, the government will not have an incentive to widen the definition of property rights beyond the level of what is needed for the markets for goods in order to reach the level which would be needed for a market for ideas. Second, the less the definition of property rights is in line with cultural understanding, the more costly it will be to enforce them.

To test these claims empirically one needs a measure of the two dimensions of property rights. To follow the bundle of rights definition of property rights we need a broader measure than that used in the literature. I use measures of economic and civil freedom in order to derive measures for the two dimensions of property rights. The cross country regressions which are run with the measures of the two dimensions of property rights as dependent variables show that, controlled for cultural determinants, economic development proxied by GDP per capita and education have a much stronger effect on the assignment dimension than on the definition dimension, while the cultural variables affect the definition dimension more. Generally, the definition dimension is less "efficient" and better explained by deeper cultural factors.

2. The efficient institutions view on property rights

The ancient political economy problem of having a government that enforces but does not violate property rights was reformulated as a key dilemma for comparative economics by Djankov et al. (2003). They develop a framework in which society faces a trade-off between the cost of private and public expropriation, and is supposed to choose the institutional mix with the lowest social cost given the institutional possibility frontier set by "civic capital". …

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