The Property-Contract Balance

Abstract

We identify a key trade-off between protecting property rights and enhancing reliance on contracts. For instance, when a dishonest intermediary transfers a good to an innocent buyer without the owner's consent, should the buyer or the owner retain the good? We show that the optimal rule maximizes the agents' valuation of the good rather than their incentives to protect property and inquire about title. Furthermore, enhancing reliance on contracts is more appealing in countries where fewer intermediaries are honest and law enforcement is more efficient. This is consistent with novel comparative-law data on the acquisition of ownership over movables. (JEL: P14, L11, Z10, K11)

Property Rights in Sequential Exchange

“…A few recent papers have developed economic models of property rights in sequential exchange environments (Medina, 2003;Ayotte and Bolton, 2011;and Dari-Mattiacci et al, 2016). As explained below, these papers importantly differ from ours in terms of analytical results, applications, and scope.…”

“…As explained below, these papers importantly differ from ours in terms of analytical results, applications, and scope. Both Medina (2003) and Dari-Mattiacci et al (2016) study the sale of stolen goods to a good faith purchaser. Medina (2003) shows that if the owner is entitled to restitution, the buyer's willingness to pay decreases, while his incentive to investigate the goods' origin may increase.…”

“…Mattiacci et al (2016) develop a model where the good's price and the probability of theft are endogenously determined, and show that in such a context, value allocation is more important than incentive inducement. The main difference between these papers and ours is that by focusing on buyer incentives as the key benefit of property rights, they are not well suited to analyze complex property and company transactions where buyer investigation is unlikely to be feasible or effective.Closer to our article, Ayotte and Bolton (2011) develop a model where an entrepreneur's assets serve as collateral for two sequential loans.…”

Property as sequential exchange: the forgotten limits of private contract

“…In particular, ‘a property right in an asset, unlike a contract right, can be enforced against subsequent transferees of other rights in the asset’ (Hansmann and Kraakman, 2002: S374). The difference in value is usually much greater than the difference in subjective valuations between contractual parties, which is often given a major role in economic models of single exchange (e.g., Schwartz and Scott, 2011; Dari-Mattiacci et al ., 2016).…”

A novel dataset on horizontal property rights in 126 jurisdictions

“… The law and the economy are deeply influenced by horizontal property rights, which are the rules regulating legal direct and indirect takings between private parties. To foster research on the determinants and impact of these institutions, we illustrate here a novel data set partially employed in (Dari-Mattiacci, Giuseppe, Carmine Guerriero, 2015; Dari-Mattiacci, Giuseppe, Carmine Guerriero, Zhenxing Huang, 2016) [3] , [4] , and (Guerriero Carmine, 2016) [6] and describing the acquisition of ownership through adverse possession of personal and real property and the use of government takings to transfer real property from a private party to another private party in 126 jurisdictions. These data are based on the laws and judicial decisions prevailing in each jurisdiction between 1981 and 2011.…”