legal essay

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

From Exogenous to Endogenous Property Rights.

Carmine Guerriero (University of Bologna)

Radzyner Law School, Herzliya. 03/09/2018.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Objectives and Organization.

– You will learn how

1. to analyze the evolution over time and impact of property rights and, more generally, to build law into a formal model.

2. to critically evaluate the observed legal variation and to propose possible reforms to the existing arrangements.

– The course is organized in three classes, i.e., 03-05-07/09/2018.

– You will be assessed on the basis of a final 1000 words essay illustrating an application of the models discussed in class to one among 10 legal cases.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Objectives and Organization.

– You will learn how

1. to analyze the evolution over time and impact of property rights and, more generally, to build law into a formal model.

2. to critically evaluate the observed legal variation and to propose possible reforms to the existing arrangements.

– The course is organized in three classes, i.e., 03-05-07/09/2018.

– You will be assessed on the basis of a final 1000 words essay illustrating an application of the models discussed in class to one among 10 legal cases.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Objectives and Organization.

– You will learn how

1. to analyze the evolution over time and impact of property rights and, more generally, to build law into a formal model.

2. to critically evaluate the observed legal variation and to propose possible reforms to the existing arrangements.

– The course is organized in three classes, i.e., 03-05-07/09/2018.

– You will be assessed on the basis of a final 1000 words essay illustrating an application of the models discussed in class to one among 10 legal cases.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Objectives and Organization.

– You will learn how

1. to analyze the evolution over time and impact of property rights and, more generally, to build law into a formal model.

2. to critically evaluate the observed legal variation and to propose possible reforms to the existing arrangements.

– The course is organized in three classes, i.e., 03-05-07/09/2018.

– You will be assessed on the basis of a final 1000 words essay illustrating an application of the models discussed in class to one among 10 legal cases.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Contents.

– Classes:

1 details the evidence on the role of “property and contracting institutions" produced by those considering them as exogenous.

2&3 illustrate a new literature studying the drivers of the protection of private property and providing, through their consideration, new conflicting evidence on the role of property rights.

3 discusses how essays should access avenues for further research.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Contents.

– Classes:

1 details the evidence on the role of “property and contracting institutions" produced by those considering them as exogenous.

2&3 illustrate a new literature studying the drivers of the protection of private property and providing, through their consideration, new conflicting evidence on the role of property rights.

3 discusses how essays should access avenues for further research.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Course Contents.

– Classes:

1 details the evidence on the role of “property and contracting institutions" produced by those considering them as exogenous.

2&3 illustrate a new literature studying the drivers of the protection of private property and providing, through their consideration, new conflicting evidence on the role of property rights.

3 discusses how essays should access avenues for further research.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Outline of Today Lesson.

— What Types of Legal Institutions Do Matter? Exogenous Property Rights Versus Exogenous Contracting Institutions?

— Towards Endogenous Property Rights: Predation Versus Disincentives.

— Towards Endogenous Property Rights: Inefficient Exclusion From Trade Versus Inefficient Expropriation.

— Final Essay (1000 Words): Structure.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Outline of Today Lesson.

— What Types of Legal Institutions Do Matter? Exogenous Property Rights Versus Exogenous Contracting Institutions?

— Towards Endogenous Property Rights: Predation Versus Disincentives.

— Towards Endogenous Property Rights: Inefficient Exclusion From Trade Versus Inefficient Expropriation.

— Final Essay (1000 Words): Structure.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Outline of Today Lesson.

— What Types of Legal Institutions Do Matter? Exogenous Property Rights Versus Exogenous Contracting Institutions?

— Towards Endogenous Property Rights: Predation Versus Disincentives.

— Towards Endogenous Property Rights: Inefficient Exclusion From Trade Versus Inefficient Expropriation.

— Final Essay (1000 Words): Structure.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Outline of the Course and of Today Lesson.

Outline of Today Lesson.

— What Types of Legal Institutions Do Matter? Exogenous Property Rights Versus Exogenous Contracting Institutions?

— Towards Endogenous Property Rights: Predation Versus Disincentives.

— Towards Endogenous Property Rights: Inefficient Exclusion From Trade Versus Inefficient Expropriation.

— Final Essay (1000 Words): Structure.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

What Types of Legal Institutions Do Matter? Exogenous Property Rights

Versus Exogenous Contracting Institutions?

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

A Closer Look at the Coase Theorem: . . .

– If property rights are well defined, limited transaction costs—i.e., “any impediments or costs of negotiating"—allow agents to efficiently organize transactions without state’s intervention and regardless of initial allocations.

Remarks:

1. allocative efficiency, i.e., best use of goods, services, and inputs.

2. Efficiency and invariance of the bargaining depends on complete information, bilateral spillovers, and absence of hold-up failures.

3. Was Coase against regulation? Should then property be fully protected?

← e.g., Talking out-loud during lectures is worth 5 to one of you and induces a loss of 1 to everybody else. Then, we can reach allocative efficiency—you shutting up—by either assigning the property of silence to your colleagues or that of shouting to you and having you compensated for silence.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

A Closer Look at the Coase Theorem: . . .

– If property rights are well defined, limited transaction costs—i.e., “any impediments or costs of negotiating"—allow agents to efficiently organize transactions without state’s intervention and regardless of initial allocations.

Remarks:

1. allocative efficiency, i.e., best use of goods, services, and inputs.

2. Efficiency and invariance of the bargaining depends on complete information, bilateral spillovers, and absence of hold-up failures.

3. Was Coase against regulation? Should then property be fully protected?

← e.g., Talking out-loud during lectures is worth 5 to one of you and induces a loss of 1 to everybody else. Then, we can reach allocative efficiency—you shutting up—by either assigning the property of silence to your colleagues or that of shouting to you and having you compensated for silence.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

A Closer Look at the Coase Theorem: . . .

– If property rights are well defined, limited transaction costs—i.e., “any impediments or costs of negotiating"—allow agents to efficiently organize transactions without state’s intervention and regardless of initial allocations.

Remarks:

1. allocative efficiency, i.e., best use of goods, services, and inputs.

2. Efficiency and invariance of the bargaining depends on complete information, bilateral spillovers, and absence of hold-up failures.

3. Was Coase against regulation? Should then property be fully protected?

← e.g., Talking out-loud during lectures is worth 5 to one of you and induces a loss of 1 to everybody else. Then, we can reach allocative efficiency—you shutting up—by either assigning the property of silence to your colleagues or that of shouting to you and having you compensated for silence.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

A Closer Look at the Coase Theorem: . . .

– If property rights are well defined, limited transaction costs—i.e., “any impediments or costs of negotiating"—allow agents to efficiently organize transactions without state’s intervention and regardless of initial allocations.

Remarks:

1. allocative efficiency, i.e., best use of goods, services, and inputs.

2. Efficiency and invariance of the bargaining depends on complete information, bilateral spillovers, and absence of hold-up failures.

3. Was Coase against regulation? Should then property be fully protected?

← e.g., Talking out-loud during lectures is worth 5 to one of you and induces a loss of 1 to everybody else. Then, we can reach allocative efficiency—you shutting up—by either assigning the property of silence to your colleagues or that of shouting to you and having you compensated for silence.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

A Closer Look at the Coase Theorem: . . .

– If property rights are well defined, limited transaction costs—i.e., “any impediments or costs of negotiating"—allow agents to efficiently organize transactions without state’s intervention and regardless of initial allocations.

Remarks:

1. allocative efficiency, i.e., best use of goods, services, and inputs.

2. Efficiency and invariance of the bargaining depends on complete information, bilateral spillovers, and absence of hold-up failures.

3. Was Coase against regulation? Should then property be fully protected?

← e.g., Talking out-loud during lectures is worth 5 to one of you and induces a loss of 1 to everybody else. Then, we can reach allocative efficiency—you shutting up—by either assigning the property of silence to your colleagues or that of shouting to you and having you compensated for silence.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Low Transaction Costs Vs. . . .

→ Then, we care about legal traditions or origins, i.e.,

lawmaking institutions—i.e., case and statute law—that aggregate the citizens’ preferences and the firms’ technology into laws;

adjudication institutions—i.e., discretion and bright-line rules—that determine the judges’ ability to make law.

← These rules enhance the reliance on contracts and, thus, are called by Acemoglu and Johnson (2005) contracting institutions.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Low Transaction Costs Vs. . . .

→ Then, we care about legal traditions or origins, i.e.,

lawmaking institutions—i.e., case and statute law—that aggregate the citizens’ preferences and the firms’ technology into laws;

adjudication institutions—i.e., discretion and bright-line rules—that determine the judges’ ability to make law.

← These rules enhance the reliance on contracts and, thus, are called by Acemoglu and Johnson (2005) contracting institutions.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Low Transaction Costs Vs. . . .

→ Then, we care about legal traditions or origins, i.e.,

lawmaking institutions—i.e., case and statute law—that aggregate the citizens’ preferences and the firms’ technology into laws;

adjudication institutions—i.e., discretion and bright-line rules—that determine the judges’ ability to make law.

← These rules enhance the reliance on contracts and, thus, are called by Acemoglu and Johnson (2005) contracting institutions.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Low Transaction Costs Vs. . . .

→ Then, we care about legal traditions or origins, i.e.,

lawmaking institutions—i.e., case and statute law—that aggregate the citizens’ preferences and the firms’ technology into laws;

adjudication institutions—i.e., discretion and bright-line rules—that determine the judges’ ability to make law.

← These rules enhance the reliance on contracts and, thus, are called by Acemoglu and Johnson (2005) contracting institutions.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Large Transaction Costs . . .

– If property rights are well defined, large transaction costs entail that legal entitlements—i.e., rights established by law and avoding that “might makes right" (Calabresi and Melamed, 1972)—shape the efficiency of the final allocation, i.e., liability should be assigned to the least-social cost avoider.

← e.g., if we cannot contract on silence then assigning property rights on shouting leads to inefficiency. To fix this issue, we should then impose a liability rule such that the rest of the class can force silence by paying ex post strictly less than 1 but enough to induce your colleague to participate.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Large Transaction Costs . . .

– If property rights are well defined, large transaction costs entail that legal entitlements—i.e., rights established by law and avoding that “might makes right" (Calabresi and Melamed, 1972)—shape the efficiency of the final allocation, i.e., liability should be assigned to the least-social cost avoider.

← e.g., if we cannot contract on silence then assigning property rights on shouting leads to inefficiency. To fix this issue, we should then impose a liability rule such that the rest of the class can force silence by paying ex post strictly less than 1 but enough to induce your colleague to participate.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

In the Design of Markets.

The, we should care about selecting the proper mix of

property rules assigning the initial entitlement to a subject who can then voluntarily transfer it at a price of her/his choice;

liability rules fixing the price at which the entitlement can be transferred without the need for a voluntary transaction;

inalienability rules forbidding the voluntary transfer of the entitlement.

← Acemoglu and Johnson (2005) focus on the first ones and call them property rights institutions, since they think about state expropriation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

In the Design of Markets.

The, we should care about selecting the proper mix of

property rules assigning the initial entitlement to a subject who can then voluntarily transfer it at a price of her/his choice;

liability rules fixing the price at which the entitlement can be transferred without the need for a voluntary transaction;

inalienability rules forbidding the voluntary transfer of the entitlement.

← Acemoglu and Johnson (2005) focus on the first ones and call them property rights institutions, since they think about state expropriation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

In the Design of Markets.

The, we should care about selecting the proper mix of

property rules assigning the initial entitlement to a subject who can then voluntarily transfer it at a price of her/his choice;

liability rules fixing the price at which the entitlement can be transferred without the need for a voluntary transaction;

inalienability rules forbidding the voluntary transfer of the entitlement.

← Acemoglu and Johnson (2005) focus on the first ones and call them property rights institutions, since they think about state expropriation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

In the Design of Markets.

The, we should care about selecting the proper mix of

property rules assigning the initial entitlement to a subject who can then voluntarily transfer it at a price of her/his choice;

liability rules fixing the price at which the entitlement can be transferred without the need for a voluntary transaction;

inalienability rules forbidding the voluntary transfer of the entitlement.

← Acemoglu and Johnson (2005) focus on the first ones and call them property rights institutions, since they think about state expropriation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

In the Design of Markets.

The, we should care about selecting the proper mix of

property rules assigning the initial entitlement to a subject who can then voluntarily transfer it at a price of her/his choice;

liability rules fixing the price at which the entitlement can be transferred without the need for a voluntary transaction;

inalienability rules forbidding the voluntary transfer of the entitlement.

← Acemoglu and Johnson (2005) focus on the first ones and call them property rights institutions, since they think about state expropriation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Acemoglu and Johnson (2005).

– To evaluate the impact of contracting institutions Fc and property rights institutions Ic on economic development Yc, they run regressions of the type

Yc = αFc + βIc + Z′iγ0 + �c,

where Zi gathers the controls. Yc can be the GDP per capita, the investment over GDP, the private credit over GDP, and the stock market capitalization. Fc can be an index of formality in legal procedures for collecting on a bounced check, and two similar proxies for collecting an unpaid commercial debt. Ic can be the Polity IV constraint on the executive score, the PRS/Heritage Foundation subjective measure of private property protection.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Acemoglu and Johnson (2005).

– To evaluate the impact of contracting institutions Fc and property rights institutions Ic on economic development Yc, they run regressions of the type

Yc = αFc + βIc + Z′iγ0 + �c,

where Zi gathers the controls. Yc can be the GDP per capita, the investment over GDP, the private credit over GDP, and the stock market capitalization. Fc can be an index of formality in legal procedures for collecting on a bounced check, and two similar proxies for collecting an unpaid commercial debt. Ic can be the Polity IV constraint on the executive score, the PRS/Heritage Foundation subjective measure of private property protection.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Inconsistent OLS and . . .

– OLS: growth, investment, and financial development are correlated with both institutions (Table 2). Yet, such correlations do not establish causality.

reverse causality: the two institutional arrangements Fc and Ic might be driven instead by Yc, i.e., the modernization hypothesis.

omitted variable bias, i.e., heterogeneity, transaction costs, culture, and quality of law enforcement might determine both institutions and Yc.

measurement error, i.e., we observe F̃c and Ĩc instead of Fc and Ic.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Inconsistent OLS and . . .

– OLS: growth, investment, and financial development are correlated with both institutions (Table 2). Yet, such correlations do not establish causality.

reverse causality: the two institutional arrangements Fc and Ic might be driven instead by Yc, i.e., the modernization hypothesis.

omitted variable bias, i.e., heterogeneity, transaction costs, culture, and quality of law enforcement might determine both institutions and Yc.

measurement error, i.e., we observe F̃c and Ĩc instead of Fc and Ic.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Inconsistent OLS and . . .

– OLS: growth, investment, and financial development are correlated with both institutions (Table 2). Yet, such correlations do not establish causality.

reverse causality: the two institutional arrangements Fc and Ic might be driven instead by Yc, i.e., the modernization hypothesis.

omitted variable bias, i.e., heterogeneity, transaction costs, culture, and quality of law enforcement might determine both institutions and Yc.

measurement error, i.e., we observe F̃c and Ĩc instead of Fc and Ic.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Inconsistent OLS and . . .

– OLS: growth, investment, and financial development are correlated with both institutions (Table 2). Yet, such correlations do not establish causality.

reverse causality: the two institutional arrangements Fc and Ic might be driven instead by Yc, i.e., the modernization hypothesis.

omitted variable bias, i.e., heterogeneity, transaction costs, culture, and quality of law enforcement might determine both institutions and Yc.

measurement error, i.e., we observe F̃c and Ĩc instead of Fc and Ic.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Consistent (?) 2SLS.

– Exploit exogenous variation in Fc and Ic driven by colonial history:

Fc = δ1Lc + η1Mc + Z′iγ1 + u1c where Lc is an English common law dummy ← primacy of common law legal origins (La Porta et al., 1997), which is however only putative (Guerriero, 2016a, b).

Ic = δ2Lc + η2Mc + Z′iγ2 + u2c, where Mc is either the log mortality rate of European settlers or the log of the indigenous population density in 1500 ← exogenous allocation of political institutions due to colonialism (Acemoglu, Johnson, and Robinson, 2001, 2002).

– The instruments enter in a separable way into the first stages (table 3).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Consistent (?) 2SLS.

– Exploit exogenous variation in Fc and Ic driven by colonial history:

Fc = δ1Lc + η1Mc + Z′iγ1 + u1c where Lc is an English common law dummy ← primacy of common law legal origins (La Porta et al., 1997), which is however only putative (Guerriero, 2016a, b).

Ic = δ2Lc + η2Mc + Z′iγ2 + u2c, where Mc is either the log mortality rate of European settlers or the log of the indigenous population density in 1500 ← exogenous allocation of political institutions due to colonialism (Acemoglu, Johnson, and Robinson, 2001, 2002).

– The instruments enter in a separable way into the first stages (table 3).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Consistent (?) 2SLS.

– Exploit exogenous variation in Fc and Ic driven by colonial history:

Fc = δ1Lc + η1Mc + Z′iγ1 + u1c where Lc is an English common law dummy ← primacy of common law legal origins (La Porta et al., 1997), which is however only putative (Guerriero, 2016a, b).

Ic = δ2Lc + η2Mc + Z′iγ2 + u2c, where Mc is either the log mortality rate of European settlers or the log of the indigenous population density in 1500 ← exogenous allocation of political institutions due to colonialism (Acemoglu, Johnson, and Robinson, 2001, 2002).

– The instruments enter in a separable way into the first stages (table 3).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Main Results.

– 2SLS estimates in tables 4-9 document that:

1. Ic has a first-order effect on all proxies for Yc;

2. Fc appears to matter only for the form of financial intermediation.

– The results are robust to changing samples, controlling for macroeconomic policies, religion, and latitude, and employing firm-level data.

← Regardless of transaction costs, individuals can deal with weak contracting institutions by altering but cannot avoid predation!!!

↔ This makes sense only if predation is detrimental and sufficiently likely.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Main Results.

– 2SLS estimates in tables 4-9 document that:

1. Ic has a first-order effect on all proxies for Yc;

2. Fc appears to matter only for the form of financial intermediation.

– The results are robust to changing samples, controlling for macroeconomic policies, religion, and latitude, and employing firm-level data.

← Regardless of transaction costs, individuals can deal with weak contracting institutions by altering but cannot avoid predation!!!

↔ This makes sense only if predation is detrimental and sufficiently likely.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Main Results.

– 2SLS estimates in tables 4-9 document that:

1. Ic has a first-order effect on all proxies for Yc;

2. Fc appears to matter only for the form of financial intermediation.

– The results are robust to changing samples, controlling for macroeconomic policies, religion, and latitude, and employing firm-level data.

← Regardless of transaction costs, individuals can deal with weak contracting institutions by altering but cannot avoid predation!!!

↔ This makes sense only if predation is detrimental and sufficiently likely.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Main Results.

– 2SLS estimates in tables 4-9 document that:

1. Ic has a first-order effect on all proxies for Yc;

2. Fc appears to matter only for the form of financial intermediation.

– The results are robust to changing samples, controlling for macroeconomic policies, religion, and latitude, and employing firm-level data.

← Regardless of transaction costs, individuals can deal with weak contracting institutions by altering but cannot avoid predation!!!

↔ This makes sense only if predation is detrimental and sufficiently likely.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Main Results.

– 2SLS estimates in tables 4-9 document that:

1. Ic has a first-order effect on all proxies for Yc;

2. Fc appears to matter only for the form of financial intermediation.

– The results are robust to changing samples, controlling for macroeconomic policies, religion, and latitude, and employing firm-level data.

← Regardless of transaction costs, individuals can deal with weak contracting institutions by altering but cannot avoid predation!!!

↔ This makes sense only if predation is detrimental and sufficiently likely.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Exogenous Institutions Approach: Inconsistency of . . .

– Inconsistency of the measurement and, in particular, of the choice of the

proxy for Lc since it does not capture the whole bundle of lawmaking and adjudication institutions (Guerriero, 2016a);

proxy for Ic since it gauges the protection of vertical property rights but not that of horizontal property rights (Guerriero, 2016c).

← measurement error might not be an issue if both Lc and Mc are strong, separate and above all excluded. Instead,

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Exogenous Institutions Approach: Inconsistency of . . .

– Inconsistency of the measurement and, in particular, of the choice of the

proxy for Lc since it does not capture the whole bundle of lawmaking and adjudication institutions (Guerriero, 2016a);

proxy for Ic since it gauges the protection of vertical property rights but not that of horizontal property rights (Guerriero, 2016c).

← measurement error might not be an issue if both Lc and Mc are strong, separate and above all excluded. Instead,

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

Exogenous Institutions Approach: Inconsistency of . . .

– Inconsistency of the measurement and, in particular, of the choice of the

proxy for Lc since it does not capture the whole bundle of lawmaking and adjudication institutions (Guerriero, 2016a);

proxy for Ic since it gauges the protection of vertical property rights but not that of horizontal property rights (Guerriero, 2016c).

← measurement error might not be an issue if both Lc and Mc are strong, separate and above all excluded. Instead,

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

the Identification Strategy.

– Inconsistency of the exclusion restrictions regarding both

Fc since legal traditions evolve as driven by the quality of political institutions and preference heterogeneity (Guerriero, 2016b);

Ic since the protection of property is itself a function of the extent of preference heterogenity, strength of a culture of self-reliance, and severity of transaction costs (D&G, 2015; Guerriero, 2016c, 2017).

Next, we will first clarify the predation vs. disicentives trade-off, and then we will evaluate the role of the other drivers of property rights.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

the Identification Strategy.

– Inconsistency of the exclusion restrictions regarding both

Fc since legal traditions evolve as driven by the quality of political institutions and preference heterogeneity (Guerriero, 2016b);

Ic since the protection of property is itself a function of the extent of preference heterogenity, strength of a culture of self-reliance, and severity of transaction costs (D&G, 2015; Guerriero, 2016c, 2017).

Next, we will first clarify the predation vs. disicentives trade-off, and then we will evaluate the role of the other drivers of property rights.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Acemoglu and Johnson (2005).

the Identification Strategy.

– Inconsistency of the exclusion restrictions regarding both

Fc since legal traditions evolve as driven by the quality of political institutions and preference heterogeneity (Guerriero, 2016b);

Ic since the protection of property is itself a function of the extent of preference heterogenity, strength of a culture of self-reliance, and severity of transaction costs (D&G, 2015; Guerriero, 2016c, 2017).

Next, we will first clarify the predation vs. disicentives trade-off, and then we will evaluate the role of the other drivers of property rights.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

Towards Endogenous Property Rights: Coercion Versus Predation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

The Disincentive Effect of Weak Property Rights.

– A mass one of producers produce x = (1 − τ) (ρv + z), where τ is the extent of predation, v the quality of the technology, and z the extent of non-produced output. The investment costs equal ρ

2

2 .

– Investment ρ∗ = (1 − τ) v, output x∗ = [(1 − τ) v]2 + (1 − τ) z, and profit π∗ =

[(1−τ)v]2 2 + (1 − τ) z fall with the extent of public expropriation.

– Furthermore, strong property rights expand trade and facilitate credit markets, i.e., the de Soto effect (Besley and Ghatak, 2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

The Disincentive Effect of Weak Property Rights.

– A mass one of producers produce x = (1 − τ) (ρv + z), where τ is the extent of predation, v the quality of the technology, and z the extent of non-produced output. The investment costs equal ρ

2

2 .

– Investment ρ∗ = (1 − τ) v, output x∗ = [(1 − τ) v]2 + (1 − τ) z, and profit π∗ =

[(1−τ)v]2 2 + (1 − τ) z fall with the extent of public expropriation.

– Furthermore, strong property rights expand trade and facilitate credit markets, i.e., the de Soto effect (Besley and Ghatak, 2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

The Disincentive Effect of Weak Property Rights.

– A mass one of producers produce x = (1 − τ) (ρv + z), where τ is the extent of predation, v the quality of the technology, and z the extent of non-produced output. The investment costs equal ρ

2

2 .

– Investment ρ∗ = (1 − τ) v, output x∗ = [(1 − τ) v]2 + (1 − τ) z, and profit π∗ =

[(1−τ)v]2 2 + (1 − τ) z fall with the extent of public expropriation.

– Furthermore, strong property rights expand trade and facilitate credit markets, i.e., the de Soto effect (Besley and Ghatak, 2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

Endogenous Property Rights, Democracy, and Resources.

– The coercive authority will set a level of expropriation maximizing τ (ρv + z)−βτ = τ (1 − τ) v2 + τz −βτ.

– Therefore, τ∗ = 12 + z−β 2v2 . This equilibrium predation level is bigger

the lower β is: inclusive political institutions curbing expropriation;

the weaker is the technological distortion measured by v;

the higher is non-produced output z, i.e., the “resource course.”

– Evidence: Figures 1-3 and Tables 2 and 3 in Besley and Ghatak (2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

Endogenous Property Rights, Democracy, and Resources.

– The coercive authority will set a level of expropriation maximizing τ (ρv + z)−βτ = τ (1 − τ) v2 + τz −βτ.

– Therefore, τ∗ = 12 + z−β 2v2 . This equilibrium predation level is bigger

the lower β is: inclusive political institutions curbing expropriation;

the weaker is the technological distortion measured by v;

the higher is non-produced output z, i.e., the “resource course.”

– Evidence: Figures 1-3 and Tables 2 and 3 in Besley and Ghatak (2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

Endogenous Property Rights, Democracy, and Resources.

– The coercive authority will set a level of expropriation maximizing τ (ρv + z)−βτ = τ (1 − τ) v2 + τz −βτ.

– Therefore, τ∗ = 12 + z−β 2v2 . This equilibrium predation level is bigger

the lower β is: inclusive political institutions curbing expropriation;

the weaker is the technological distortion measured by v;

the higher is non-produced output z, i.e., the “resource course.”

– Evidence: Figures 1-3 and Tables 2 and 3 in Besley and Ghatak (2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

Endogenous Property Rights, Democracy, and Resources.

– The coercive authority will set a level of expropriation maximizing τ (ρv + z)−βτ = τ (1 − τ) v2 + τz −βτ.

– Therefore, τ∗ = 12 + z−β 2v2 . This equilibrium predation level is bigger

the lower β is: inclusive political institutions curbing expropriation;

the weaker is the technological distortion measured by v;

the higher is non-produced output z, i.e., the “resource course.”

– Evidence: Figures 1-3 and Tables 2 and 3 in Besley and Ghatak (2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Coercion Versus Predation.

Endogenous Property Rights, Democracy, and Resources.

– The coercive authority will set a level of expropriation maximizing τ (ρv + z)−βτ = τ (1 − τ) v2 + τz −βτ.

– Therefore, τ∗ = 12 + z−β 2v2 . This equilibrium predation level is bigger

the lower β is: inclusive political institutions curbing expropriation;

the weaker is the technological distortion measured by v;

the higher is non-produced output z, i.e., the “resource course.”

– Evidence: Figures 1-3 and Tables 2 and 3 in Besley and Ghatak (2010).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Towards Endogenous Property Rights: Inefficient Exclusion From Trade

Versus Inefficient Expropriation.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Missing Points, i.e., the Putative Ubiquity of Predation . . .

– How important is predation? It is a key issue only in developing countries in times of conflicts (Besley and Ghatak 2010, table 1):

Mexico nationalized between 1936 and 1938 direct US investments in agriculture, railways, and oil extraction unleashing a US-guided coup.

Iran expropriated in 1951 the British oil production facilities triggering a coup jointly orchestrated by the UK and the USA.

. . .

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Missing Points, i.e., the Putative Ubiquity of Predation . . .

– How important is predation? It is a key issue only in developing countries in times of conflicts (Besley and Ghatak 2010, table 1):

Mexico nationalized between 1936 and 1938 direct US investments in agriculture, railways, and oil extraction unleashing a US-guided coup.

Iran expropriated in 1951 the British oil production facilities triggering a coup jointly orchestrated by the UK and the USA.

. . .

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Missing Points, i.e., the Putative Ubiquity of Predation . . .

– How important is predation? It is a key issue only in developing countries in times of conflicts (Besley and Ghatak 2010, table 1):

Mexico nationalized between 1936 and 1938 direct US investments in agriculture, railways, and oil extraction unleashing a US-guided coup.

Iran expropriated in 1951 the British oil production facilities triggering a coup jointly orchestrated by the UK and the USA.

. . .

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Missing Points, i.e., the Putative Ubiquity of Predation . . .

– How important is predation? It is a key issue only in developing countries in times of conflicts (Besley and Ghatak 2010, table 1):

Mexico nationalized between 1936 and 1938 direct US investments in agriculture, railways, and oil extraction unleashing a US-guided coup.

Iran expropriated in 1951 the British oil production facilities triggering a coup jointly orchestrated by the UK and the USA.

. . .

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

and the General Incompleteness of Property Rights.

– All jurisdictions, both developed and underdeveloped, whether run by a democratic government or an undemocratic regime, allow perfectly legal private expropriation in the face of sizable transaction costs, i.e.,

Direct private takings: non consensual takings among private agents possibly intermediated by a private agent acting as an intermediary.

Indirect private takings: expropriation mediated by the state, which transfers without consent property from a private party to another private party for profit—and not for public interest—goals.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

and the General Incompleteness of Property Rights.

– All jurisdictions, both developed and underdeveloped, whether run by a democratic government or an undemocratic regime, allow perfectly legal private expropriation in the face of sizable transaction costs, i.e.,

Direct private takings: non consensual takings among private agents possibly intermediated by a private agent acting as an intermediary.

Indirect private takings: expropriation mediated by the state, which transfers without consent property from a private party to another private party for profit—and not for public interest—goals.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

The Property-Contract Balance: . . .

– Two legal sources of property rights acquisition:

Original acquisition, e.g., wild animals, invention, . . .

Derivative acquisition from an owner, e.g., inheritance, sale, . . .

– While in the former case the right is unlimited, in the latter it is derivative:

O Original owner

OI-transfer−−−−−−−→ IIntermediary IB-transfer−−−−−−−→ BBuyer

– The OI-transfer may happen via “coercion” and be non consensual. Then via contract, tort, or unjust-enrichment remedies, the losing buyer can recover the price from the intermediary if traceable, solvent, and liable. Otherwise, society should balance property rights and reliance on contracts.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

The Property-Contract Balance: . . .

– Two legal sources of property rights acquisition:

Original acquisition, e.g., wild animals, invention, . . .

Derivative acquisition from an owner, e.g., inheritance, sale, . . .

– While in the former case the right is unlimited, in the latter it is derivative:

O Original owner

OI-transfer−−−−−−−→ IIntermediary IB-transfer−−−−−−−→ BBuyer

– The OI-transfer may happen via “coercion” and be non consensual. Then via contract, tort, or unjust-enrichment remedies, the losing buyer can recover the price from the intermediary if traceable, solvent, and liable. Otherwise, society should balance property rights and reliance on contracts.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

The Property-Contract Balance: . . .

– Two legal sources of property rights acquisition:

Original acquisition, e.g., wild animals, invention, . . .

Derivative acquisition from an owner, e.g., inheritance, sale, . . .

– While in the former case the right is unlimited, in the latter it is derivative:

O Original owner

OI-transfer−−−−−−−→ IIntermediary IB-transfer−−−−−−−→ BBuyer

– The OI-transfer may happen via “coercion” and be non consensual. Then via contract, tort, or unjust-enrichment remedies, the losing buyer can recover the price from the intermediary if traceable, solvent, and liable. Otherwise, society should balance property rights and reliance on contracts.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

The Property-Contract Balance: . . .

– Two legal sources of property rights acquisition:

Original acquisition, e.g., wild animals, invention, . . .

Derivative acquisition from an owner, e.g., inheritance, sale, . . .

– While in the former case the right is unlimited, in the latter it is derivative:

O Original owner

OI-transfer−−−−−−−→ IIntermediary IB-transfer−−−−−−−→ BBuyer

– The OI-transfer may happen via “coercion” and be non consensual. Then via contract, tort, or unjust-enrichment remedies, the losing buyer can recover the price from the intermediary if traceable, solvent, and liable. Otherwise, society should balance property rights and reliance on contracts.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

The Property-Contract Balance: . . .

– Two legal sources of property rights acquisition:

Original acquisition, e.g., wild animals, invention, . . .

Derivative acquisition from an owner, e.g., inheritance, sale, . . .

– While in the former case the right is unlimited, in the latter it is derivative:

O Original owner

OI-transfer−−−−−−−→ IIntermediary IB-transfer−−−−−−−→ BBuyer

– The OI-transfer may happen via “coercion” and be non consensual. Then via contract, tort, or unjust-enrichment remedies, the losing buyer can recover the price from the intermediary if traceable, solvent, and liable. Otherwise, society should balance property rights and reliance on contracts.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

The Property-Contract Balance: . . .

– Two legal sources of property rights acquisition:

Original acquisition, e.g., wild animals, invention, . . .

Derivative acquisition from an owner, e.g., inheritance, sale, . . .

– While in the former case the right is unlimited, in the latter it is derivative:

O Original owner

OI-transfer−−−−−−−→ IIntermediary IB-transfer−−−−−−−→ BBuyer

– The OI-transfer may happen via “coercion” and be non consensual. Then via contract, tort, or unjust-enrichment remedies, the losing buyer can recover the price from the intermediary if traceable, solvent, and liable. Otherwise, society should balance property rights and reliance on contracts.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Paradigmatic Case of Stolen Goods (1), . . .

— “I” steals a good from “O.”

— “B” buys from “I” in good faith.

— “O” finds the good and reclaims it from “B” since “I” is “gone.”

— Should “B” give the good back to “O?" More generally, should the legal system safeguard the original owner or the good faith buyer?

→ Stolen-art market “is a looming criminal enterprise with estimated losses running as high as $6 billion annually" (FBI, 2012).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Paradigmatic Case of Stolen Goods (1), . . .

— “I” steals a good from “O.”

— “B” buys from “I” in good faith.

— “O” finds the good and reclaims it from “B” since “I” is “gone.”

— Should “B” give the good back to “O?" More generally, should the legal system safeguard the original owner or the good faith buyer?

→ Stolen-art market “is a looming criminal enterprise with estimated losses running as high as $6 billion annually" (FBI, 2012).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Paradigmatic Case of Stolen Goods (1), . . .

— “I” steals a good from “O.”

— “B” buys from “I” in good faith.

— “O” finds the good and reclaims it from “B” since “I” is “gone.”

— Should “B” give the good back to “O?" More generally, should the legal system safeguard the original owner or the good faith buyer?

→ Stolen-art market “is a looming criminal enterprise with estimated losses running as high as $6 billion annually" (FBI, 2012).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Paradigmatic Case of Stolen Goods (1), . . .

— “I” steals a good from “O.”

— “B” buys from “I” in good faith.

— “O” finds the good and reclaims it from “B” since “I” is “gone.”

— Should “B” give the good back to “O?" More generally, should the legal system safeguard the original owner or the good faith buyer?

→ Stolen-art market “is a looming criminal enterprise with estimated losses running as high as $6 billion annually" (FBI, 2012).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Paradigmatic Case of Stolen Goods (1), . . .

— “I” steals a good from “O.”

— “B” buys from “I” in good faith.

— “O” finds the good and reclaims it from “B” since “I” is “gone.”

— Should “B” give the good back to “O?" More generally, should the legal system safeguard the original owner or the good faith buyer?

→ Stolen-art market “is a looming criminal enterprise with estimated losses running as high as $6 billion annually" (FBI, 2012).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Double Sale of Real Estate (2), . . .

— “I” sells his house to “O.”

— Before the sale is registered, “I” sells his house again to “B.”

— “B” is not aware of the first sale and registers the transfer before “O.”

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Double Sale of Real Estate (2), . . .

— “I” sells his house to “O.”

— Before the sale is registered, “I” sells his house again to “B.”

— “B” is not aware of the first sale and registers the transfer before “O.”

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Double Sale of Real Estate (2), . . .

— “I” sells his house to “O.”

— Before the sale is registered, “I” sells his house again to “B.”

— “B” is not aware of the first sale and registers the transfer before “O.”

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Double Sale of Real Estate (2), . . .

— “I” sells his house to “O.”

— Before the sale is registered, “I” sells his house again to “B.”

— “B” is not aware of the first sale and registers the transfer before “O.”

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Embezzlement (3), . . .

— “O” rents a space in the safe owned by “I” to store his jewelry.

— “I” sells the jewelry to “B.”

— “B” thinks the jewelry belongs to “I.”

— Should the legal system safeguard “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Embezzlement (3), . . .

— “O” rents a space in the safe owned by “I” to store his jewelry.

— “I” sells the jewelry to “B.”

— “B” thinks the jewelry belongs to “I.”

— Should the legal system safeguard “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Embezzlement (3), . . .

— “O” rents a space in the safe owned by “I” to store his jewelry.

— “I” sells the jewelry to “B.”

— “B” thinks the jewelry belongs to “I.”

— Should the legal system safeguard “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Embezzlement (3), . . .

— “O” rents a space in the safe owned by “I” to store his jewelry.

— “I” sells the jewelry to “B.”

— “B” thinks the jewelry belongs to “I.”

— Should the legal system safeguard “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Unauthorized Agency (4), . . .

— “O” hires “I” as a salesman in his shop.

— “I” sells the shop furniture to “B" without having a mandate to do so.

— “B” thinks that “I” is authorized to sell furniture.

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Unauthorized Agency (4), . . .

— “O” hires “I” as a salesman in his shop.

— “I” sells the shop furniture to “B" without having a mandate to do so.

— “B” thinks that “I” is authorized to sell furniture.

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Unauthorized Agency (4), . . .

— “O” hires “I” as a salesman in his shop.

— “I” sells the shop furniture to “B" without having a mandate to do so.

— “B” thinks that “I” is authorized to sell furniture.

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Unauthorized Agency (4), . . .

— “O” hires “I” as a salesman in his shop.

— “I” sells the shop furniture to “B" without having a mandate to do so.

— “B” thinks that “I” is authorized to sell furniture.

— Should the legal system protect “O” or “B?"

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Squatting/Invading (5), . . .

— “I” squats in the house (invades the land) owned by “O.”

— “I” sells the house (land) to “B.”

— “B” is not aware of the squatting (invasion).

— Should the legal system safeguard “O” or “B?"

→ 40% of private lands in developing countries are invaded and there are roughly two billion squatters in the world (Brueckner and Selod, 2009).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Squatting/Invading (5), . . .

— “I” squats in the house (invades the land) owned by “O.”

— “I” sells the house (land) to “B.”

— “B” is not aware of the squatting (invasion).

— Should the legal system safeguard “O” or “B?"

→ 40% of private lands in developing countries are invaded and there are roughly two billion squatters in the world (Brueckner and Selod, 2009).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Squatting/Invading (5), . . .

— “I” squats in the house (invades the land) owned by “O.”

— “I” sells the house (land) to “B.”

— “B” is not aware of the squatting (invasion).

— Should the legal system safeguard “O” or “B?"

→ 40% of private lands in developing countries are invaded and there are roughly two billion squatters in the world (Brueckner and Selod, 2009).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Squatting/Invading (5), . . .

— “I” squats in the house (invades the land) owned by “O.”

— “I” sells the house (land) to “B.”

— “B” is not aware of the squatting (invasion).

— Should the legal system safeguard “O” or “B?"

→ 40% of private lands in developing countries are invaded and there are roughly two billion squatters in the world (Brueckner and Selod, 2009).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Squatting/Invading (5), . . .

— “I” squats in the house (invades the land) owned by “O.”

— “I” sells the house (land) to “B.”

— “B” is not aware of the squatting (invasion).

— Should the legal system safeguard “O” or “B?"

→ 40% of private lands in developing countries are invaded and there are roughly two billion squatters in the world (Brueckner and Selod, 2009).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Intellectual Property (6), . . .

— A downstream “B” exploits an idea developed by the upstream “O.”

— Should the legal system protect “O” or impose the exhaustion of his intellectual property rights or the compulsory licensing of the idea?

→ Article 31 of the TRIPS agreement (Bond and Saggi, 2017).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Intellectual Property (6), . . .

— A downstream “B” exploits an idea developed by the upstream “O.”

— Should the legal system protect “O” or impose the exhaustion of his intellectual property rights or the compulsory licensing of the idea?

→ Article 31 of the TRIPS agreement (Bond and Saggi, 2017).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Intellectual Property (6), . . .

— A downstream “B” exploits an idea developed by the upstream “O.”

— Should the legal system protect “O” or impose the exhaustion of his intellectual property rights or the compulsory licensing of the idea?

→ Article 31 of the TRIPS agreement (Bond and Saggi, 2017).

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Financial Intermediation (7), . . .

— If an intermediary forges an instrument before transferring it, the current bearer and issuer will hold incompatible rights and obligations.

— Similarly, if a debtor pledges an asset as security to two creditors.

→ Blockchain ...

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Financial Intermediation (7), . . .

— If an intermediary forges an instrument before transferring it, the current bearer and issuer will hold incompatible rights and obligations.

— Similarly, if a debtor pledges an asset as security to two creditors.

→ Blockchain ...

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Financial Intermediation (7), . . .

— If an intermediary forges an instrument before transferring it, the current bearer and issuer will hold incompatible rights and obligations.

— Similarly, if a debtor pledges an asset as security to two creditors.

→ Blockchain ...

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Bankruptcy (8), . . .

— Manager “I” tunnels resources out of a firm whose creditor/minority shareholder is “O” and whose majority stockholder is “B.”

— Should the legal system safeguard the rights of “O” or those of “B?”

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Bankruptcy (8), . . .

— Manager “I” tunnels resources out of a firm whose creditor/minority shareholder is “O” and whose majority stockholder is “B.”

— Should the legal system safeguard the rights of “O” or those of “B?”

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Segmented Labor, Financial, and Housing Markets (9).

— “B” offers through agent “I” a contract to “O” at conditions more disadvantageous than those prevailing on the primary market.

— Should we protect “B”’s contract or “O"’s labor rights?

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Segmented Labor, Financial, and Housing Markets (9).

— “B” offers through agent “I” a contract to “O” at conditions more disadvantageous than those prevailing on the primary market.

— Should we protect “B”’s contract or “O"’s labor rights?

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Government Takings (10).

— State “I” expropriates an asset from “O” to give it for profit use to “B.”

— Should the legal system protect the rights of “O” or those of “B?”

→ Kelo v. City of New London, 545 U.S. 469, 2005.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Government Takings (10).

— State “I” expropriates an asset from “O” to give it for profit use to “B.”

— Should the legal system protect the rights of “O” or those of “B?”

→ Kelo v. City of New London, 545 U.S. 469, 2005.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Government Takings (10).

— State “I” expropriates an asset from “O” to give it for profit use to “B.”

— Should the legal system protect the rights of “O” or those of “B?”

→ Kelo v. City of New London, 545 U.S. 469, 2005.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Calabresi and Melamed (1972): . . .

– Ex post misallocation-driven vs. ex ante incentive-driven considerations: “Whenever a state is presented with the conflicting interests of [. . . ] two or more groups of people, it must decide which side to favor."

– “The state not only [decides] whom to entitle, but [also] which entitlements are protected and [if] an individual is allowed to [. . . ] trade the entitlement."

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Calabresi and Melamed (1972): . . .

– Ex post misallocation-driven vs. ex ante incentive-driven considerations: “Whenever a state is presented with the conflicting interests of [. . . ] two or more groups of people, it must decide which side to favor."

– “The state not only [decides] whom to entitle, but [also] which entitlements are protected and [if] an individual is allowed to [. . . ] trade the entitlement."

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Protecting Entitlements.

– Property rules:

state action “least amount [since] the state does not [fix] its value."

collective decision regards “who is to be given an initial entitlement."

– Liability rules:

“not only are entitlements protected, but their transfer or destruction is allowed on the basis of a value determined by some organ of the state."

– Inalienability rules:

“The state intervenes not only to determine who is initially entitled [but also] the compensation that must be paid if the entitlement is taken or destroyed, but also to forbid its sale under some or all circumstances."

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Protecting Entitlements.

– Property rules:

state action “least amount [since] the state does not [fix] its value."

collective decision regards “who is to be given an initial entitlement."

– Liability rules:

“not only are entitlements protected, but their transfer or destruction is allowed on the basis of a value determined by some organ of the state."

– Inalienability rules:

“The state intervenes not only to determine who is initially entitled [but also] the compensation that must be paid if the entitlement is taken or destroyed, but also to forbid its sale under some or all circumstances."

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Protecting Entitlements.

– Property rules:

state action “least amount [since] the state does not [fix] its value."

collective decision regards “who is to be given an initial entitlement."

– Liability rules:

“not only are entitlements protected, but their transfer or destruction is allowed on the basis of a value determined by some organ of the state."

– Inalienability rules:

“The state intervenes not only to determine who is initially entitled [but also] the compensation that must be paid if the entitlement is taken or destroyed, but also to forbid its sale under some or all circumstances."

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Protecting Entitlements.

– Property rules:

state action “least amount [since] the state does not [fix] its value."

collective decision regards “who is to be given an initial entitlement."

– Liability rules:

“not only are entitlements protected, but their transfer or destruction is allowed on the basis of a value determined by some organ of the state."

– Inalienability rules:

“The state intervenes not only to determine who is initially entitled [but also] the compensation that must be paid if the entitlement is taken or destroyed, but also to forbid its sale under some or all circumstances."

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selecting Property Rules: Criteria and . . .

– Entitlements to most goods are mixed, e.g., housing!!!

– Key question: what kind of entitlement should be granted, if any?

Three selection criteria: economic efficiency, distributional goals, and nondistributional goals as moralism, self paternalism and paternalism.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selecting Property Rules: Criteria and . . .

– Entitlements to most goods are mixed, e.g., housing!!!

– Key question: what kind of entitlement should be granted, if any?

Three selection criteria: economic efficiency, distributional goals, and nondistributional goals as moralism, self paternalism and paternalism.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selecting Property Rules: Criteria and . . .

– Entitlements to most goods are mixed, e.g., housing!!!

– Key question: what kind of entitlement should be granted, if any?

Three selection criteria: economic efficiency, distributional goals, and nondistributional goals as moralism, self paternalism and paternalism.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selection.

→ Liability rules should be preferred to property rules if transaction costs are large since market frictions and failures impede consensual trade and with the caveat of the choice of compensation [C&M 1971, p. 1095-6], e.g.,

eminent domain: if a compensation is not set upfront, freeloaders may forbid the realization of socially-beneficial projects.

accidents: if a compensation is not set upfront, victims of injuries might be involved in pre-accident negotiations.

→ “When a transaction would create significant [or non measurable] externalities," inalienability rules are the best option.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selection.

→ Liability rules should be preferred to property rules if transaction costs are large since market frictions and failures impede consensual trade and with the caveat of the choice of compensation [C&M 1971, p. 1095-6], e.g.,

eminent domain: if a compensation is not set upfront, freeloaders may forbid the realization of socially-beneficial projects.

accidents: if a compensation is not set upfront, victims of injuries might be involved in pre-accident negotiations.

→ “When a transaction would create significant [or non measurable] externalities," inalienability rules are the best option.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selection.

→ Liability rules should be preferred to property rules if transaction costs are large since market frictions and failures impede consensual trade and with the caveat of the choice of compensation [C&M 1971, p. 1095-6], e.g.,

eminent domain: if a compensation is not set upfront, freeloaders may forbid the realization of socially-beneficial projects.

accidents: if a compensation is not set upfront, victims of injuries might be involved in pre-accident negotiations.

→ “When a transaction would create significant [or non measurable] externalities," inalienability rules are the best option.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Exclusion From Trade Versus Inefficient Expropriation.

Selection.

→ Liability rules should be preferred to property rules if transaction costs are large since market frictions and failures impede consensual trade and with the caveat of the choice of compensation [C&M 1971, p. 1095-6], e.g.,

eminent domain: if a compensation is not set upfront, freeloaders may forbid the realization of socially-beneficial projects.

accidents: if a compensation is not set upfront, victims of injuries might be involved in pre-accident negotiations.

→ “When a transaction would create significant [or non measurable] externalities," inalienability rules are the best option.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Final Essay: Structure.

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Research Question.

The Law & Economics of Property Rights: An Essay.

– Institutional Analysis (300 words):

What kind of economic value is at stake? When is the original owner protected? And the potential buyer? Is there legal variation?

– Theorethical Analysis (400-500 words):

How can you rationalize the existence of legal variation by employing the articles covered in class?

– Conclusions (200-300 words):

What kind of policy implication can you deduce?

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Research Question.

The Law & Economics of Property Rights: An Essay.

– Institutional Analysis (300 words):

What kind of economic value is at stake? When is the original owner protected? And the potential buyer? Is there legal variation?

– Theorethical Analysis (400-500 words):

How can you rationalize the existence of legal variation by employing the articles covered in class?

– Conclusions (200-300 words):

What kind of policy implication can you deduce?

Class 1: The Law & Economics of Property Rights.

Outline. Exogenous Property Rights. Towards Endogenous Property Rights. Essay.

Research Question.

The Law & Economics of Property Rights: An Essay.

– Institutional Analysis (300 words):

What kind of economic value is at stake? When is the original owner protected? And the potential buyer? Is there legal variation?

– Theorethical Analysis (400-500 words):

How can you rationalize the existence of legal variation by employing the articles covered in class?

– Conclusions (200-300 words):

What kind of policy implication can you deduce?

Class 1: The Law & Economics of Property Rights.