The Good-Faith Purchaser: Markets, Culture, and the Legal System

Abstract

A key institutional setting is the set of rules balancing the use of coercion to the one of markets for transferring property rights. Even if all legal systems forbid theft ex ante, different societies provide different ex post solutions to the conflict arising between the original owner and the good-faith buyer of a good with defective title. These rules range from the full protection of the original owner's property right to the full protection of the buyer's reliance on contract. Looking at a world in which only intermediaries can transfer goods from original owners to buyers by using either coercion or markets, we prove that: 1. Society should accept coercion, if buyers value the good more than original owners, and minimize it, otherwise; 2. In the first of the two cases, provided that the preference polarization is not too wide, there are separating equilibria in which moral intermediaries-i.e., those for whom coercion entails a sufficiently high moral cost-signal their proper title by charging higher prices; 3. In the second of the two cases, the market shrinks because moral intermediaries refrain from coercion. Thus, mature economies-i.e., those in which original owners tend to value goods more than buyers-will move toward buyer protection, the higher is the share of moral intermediaries (lower is the quality of the legal system) because of the lower extent of coercion (lower impact of public enforcement). Estimates, based on a panel of 148 countries over the 1981-2011 period, are consistent with this prediction.