Joanna Tyrowicz Property rights and contract theory Institutional Economics

2 Background Serena & Venus Williams – real story Other examples: Use of noman’s land Use of not owned resources Benefiting from non-ownerhisp

3 Main names in the field Ronald Coase (Nobel prize) Armen Alchian Harold Demsetz Erik Furubotn Svetozar Pejovich Additional readings: Robert Cooter & Thomas Ulen, Law $ Economics, chapter 4 and 5 Lee J. Alston and Bernardo Mueller, Property Rights and the State

4 Typical questions How is ownership established? What can be owned at all? What types of ownership are specified (what can one do with the property)? What are the remedies for the violation of the property rights? THIS ALL INFLUENCES EFFICIENCY! ESPECIALLY THE DISTRIBUTION !

5 Property rights? In fact three rights 1. The right to use legitimate uses of asset e.g. you buy a national flag in US or in another country: what can you do with it? 2. The right to profit legitimate ways of profiting from ownership e.g. legislation in various countries on the penalty for drug posession 3. The right to transfer legitimate conditions of (permament) transfer e.g. what can you do with your daughter in Islam countries?

6 Economic versus legal definitions Are legal norms necessary … … or sufficient? Property rights change (it is sufficient if conditions change!) Protection of ownership is costly (at the very least effort spent on directly unproductive activities) Can property rights be ever complete? (can you predict each state contingency?)

7 What do we need to analyse institutions? If property can be transfered, it is bargained over Bargaining theory (game theory, cooperative or not!) If property is never complete, it has externalities Valuation in economics (non market goods valuation) In some cases property is even less complete than in others, so public goods appear Public goods economics (privacy versus public ownership)

8 Bargaining Cultural role of bargaining? What is cooperative and what is not? Prisonner’s dillema Can you ever enforce cooperative solutions? E.g. smoking on the train and the Her Majesty Queen of the Netherlands Poverty traps in noncooperative solutions E.g. scale effects in ownership What is the purpose of establishing institutions?

9 Ownership and efficiency? How does ownership affect efficiency? Individuals productivity and global output Market price versus willingness to sell Costs of defining, enforcing and protecting property rights Enforcement of public ownerships forms? How does efficiency affect ownership? Private and public goods? Nonrival, nonexcludable (relatively high costs of exclusion? willingness to exclude?) Market price versus willingness to purchase

10 What is the role of transaction costs then? Coase theorem: when transaction costs are nonexistent, there will always be an efficient use of resources, irrespectively of initial allocation What are transaction costs? market for lemons (Ackerlof) => risk adverse selection (Spence) => risk moral hazard (Stiglitz) => risk absolute level or relative value? E.g. how much would you spend to protect the ownership of a pen? And what if this pen does not work any more, but was inherited after grand-grand-grandfather? Rules for valuation versus rules for exchange?