Endogenous Property Rights Transaction Costs and Diversity.

Carmine Guerriero (University of Bologna)

EDLE PhD course, Bologna. 14/02/2018.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Property Rights: Misallocation Vs. Disincentives.

– When transaction costs are large, initial legal entitlements shape allocative efficiency (Coase, 1960), and liability rules, and more generally, weak property rights might be optimal (Calabresi and Melamed, 1972).

– Yet, the tendency of markets to be frictionless and the risk of predation would imply that rights should be complete when the political process is inclusive enough (Acemoglu and Johnson, 2005; Besley and Ghatak, 2010).

– Nevertheless, the main challenges to private property come ubiquitously, and most surprisingly legally, from private parties whenever transaction costs are sizeable (Bouckaert and De Geest, 1995).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Property Rights: Misallocation Vs. Disincentives.

– When transaction costs are large, initial legal entitlements shape allocative efficiency (Coase, 1960), and liability rules, and more generally, weak property rights might be optimal (Calabresi and Melamed, 1972).

– Yet, the tendency of markets to be frictionless and the risk of predation would imply that rights should be complete when the political process is inclusive enough (Acemoglu and Johnson, 2005; Besley and Ghatak, 2010).

– Nevertheless, the main challenges to private property come ubiquitously, and most surprisingly legally, from private parties whenever transaction costs are sizeable (Bouckaert and De Geest, 1995).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Property Rights: Misallocation Vs. Disincentives.

– When transaction costs are large, initial legal entitlements shape allocative efficiency (Coase, 1960), and liability rules, and more generally, weak property rights might be optimal (Calabresi and Melamed, 1972).

– Yet, the tendency of markets to be frictionless and the risk of predation would imply that rights should be complete when the political process is inclusive enough (Acemoglu and Johnson, 2005; Besley and Ghatak, 2010).

– Nevertheless, the main challenges to private property come ubiquitously, and most surprisingly legally, from private parties whenever transaction costs are sizeable (Bouckaert and De Geest, 1995).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2017).

– I formalize the Calabresi and Melamed’s (1972) intuition by devising a transaction cost-based theory of endogenous property rights for a production economy (Dari-Mattiacci and Guerriero, 2015; Guerriero, 2016; Bar-Gill and Persico, 2016; Segal and Whinston, 2016; AGZ, 2017)→

1. When potential buyers decide whether to buy or grab an asset, the original owners’ property rights fall with market frictions and failures. Market failures, in turn, rise with the dispersion in the original owners’ and potential buyers’ valuations (Dari-Mattiacci, 2012; BHK, 2014).

2. When the downstream firms decide whether to produce in-house through an old technology or to adopt a new more efficient one necessitating the upstream firms’ input, the property rights on the input fall with asset specificities. Asset specificities, in turn, rise with the odds of a more productive technology (AAZ, 2006).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2017).

– I formalize the Calabresi and Melamed’s (1972) intuition by devising a transaction cost-based theory of endogenous property rights for a production economy (Dari-Mattiacci and Guerriero, 2015; Guerriero, 2016; Bar-Gill and Persico, 2016; Segal and Whinston, 2016; AGZ, 2017)→

1. When potential buyers decide whether to buy or grab an asset, the original owners’ property rights fall with market frictions and failures. Market failures, in turn, rise with the dispersion in the original owners’ and potential buyers’ valuations (Dari-Mattiacci, 2012; BHK, 2014).

2. When the downstream firms decide whether to produce in-house through an old technology or to adopt a new more efficient one necessitating the upstream firms’ input, the property rights on the input fall with asset specificities. Asset specificities, in turn, rise with the odds of a more productive technology (AAZ, 2006).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2017).

– I formalize the Calabresi and Melamed’s (1972) intuition by devising a transaction cost-based theory of endogenous property rights for a production economy (Dari-Mattiacci and Guerriero, 2015; Guerriero, 2016; Bar-Gill and Persico, 2016; Segal and Whinston, 2016; AGZ, 2017)→

1. When potential buyers decide whether to buy or grab an asset, the original owners’ property rights fall with market frictions and failures. Market failures, in turn, rise with the dispersion in the original owners’ and potential buyers’ valuations (Dari-Mattiacci, 2012; BHK, 2014).

2. When the downstream firms decide whether to produce in-house through an old technology or to adopt a new more efficient one necessitating the upstream firms’ input, the property rights on the input fall with asset specificities. Asset specificities, in turn, rise with the odds of a more productive technology (AAZ, 2006).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Evidence.

– For a panel of 135 countries spanning the 2006-2015 period, the

protection of the original owner’s property is the weakest where market frictions and failures are the largest and the downstream firms’ property rights are the strongest where asset specificities are the largest, even

← conditional on country and year effects, income, democracy, non-produced output, conflicts, and human capital.

← when transaction costs are instrumented with the availability of latest technologies and the quality of math and science education.

→ Negative economic effect of weak property rights might be spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Evidence.

– For a panel of 135 countries spanning the 2006-2015 period, the

protection of the original owner’s property is the weakest where market frictions and failures are the largest and the downstream firms’ property rights are the strongest where asset specificities are the largest, even

← conditional on country and year effects, income, democracy, non-produced output, conflicts, and human capital.

← when transaction costs are instrumented with the availability of latest technologies and the quality of math and science education.

→ Negative economic effect of weak property rights might be spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Evidence.

– For a panel of 135 countries spanning the 2006-2015 period, the

protection of the original owner’s property is the weakest where market frictions and failures are the largest and the downstream firms’ property rights are the strongest where asset specificities are the largest, even

← conditional on country and year effects, income, democracy, non-produced output, conflicts, and human capital.

← when transaction costs are instrumented with the availability of latest technologies and the quality of math and science education.

→ Negative economic effect of weak property rights might be spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Evidence.

– For a panel of 135 countries spanning the 2006-2015 period, the

protection of the original owner’s property is the weakest where market frictions and failures are the largest and the downstream firms’ property rights are the strongest where asset specificities are the largest, even

← conditional on country and year effects, income, democracy, non-produced output, conflicts, and human capital.

← when transaction costs are instrumented with the availability of latest technologies and the quality of math and science education.

→ Negative economic effect of weak property rights might be spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Evidence.

– For a panel of 135 countries spanning the 2006-2015 period, the

protection of the original owner’s property is the weakest where market frictions and failures are the largest and the downstream firms’ property rights are the strongest where asset specificities are the largest, even

← conditional on country and year effects, income, democracy, non-produced output, conflicts, and human capital.

← when transaction costs are instrumented with the availability of latest technologies and the quality of math and science education.

→ Negative economic effect of weak property rights might be spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2016).

– In a—possibly production—economy populated by traders:

→ Original owners’ rights trade-off exclusion from trade of middle valuation potential buyers and expropriation by low-valuation ones.

– Testable prediction:

1. the original owners’ rights increase with preference heterogeneity.

– Data on a cross-section of 126 jurisdictions for which no relevant reform between 1981 and 2011 has been reported to Giuseppe Dari-Mattiacci and me by members of the Lex Mundi project and HG.org group,

→ confirm the model prediction across identification strategies.

→ show the inconsistency of predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2016).

– In a—possibly production—economy populated by traders:

→ Original owners’ rights trade-off exclusion from trade of middle valuation potential buyers and expropriation by low-valuation ones.

– Testable prediction:

1. the original owners’ rights increase with preference heterogeneity.

– Data on a cross-section of 126 jurisdictions for which no relevant reform between 1981 and 2011 has been reported to Giuseppe Dari-Mattiacci and me by members of the Lex Mundi project and HG.org group,

→ confirm the model prediction across identification strategies.

→ show the inconsistency of predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2016).

– In a—possibly production—economy populated by traders:

→ Original owners’ rights trade-off exclusion from trade of middle valuation potential buyers and expropriation by low-valuation ones.

– Testable prediction:

1. the original owners’ rights increase with preference heterogeneity.

– Data on a cross-section of 126 jurisdictions for which no relevant reform between 1981 and 2011 has been reported to Giuseppe Dari-Mattiacci and me by members of the Lex Mundi project and HG.org group,

→ confirm the model prediction across identification strategies.

→ show the inconsistency of predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Guerriero (2016).

– In a—possibly production—economy populated by traders:

→ Original owners’ rights trade-off exclusion from trade of middle valuation potential buyers and expropriation by low-valuation ones.

– Testable prediction:

1. the original owners’ rights increase with preference heterogeneity.

– Data on a cross-section of 126 jurisdictions for which no relevant reform between 1981 and 2011 has been reported to Giuseppe Dari-Mattiacci and me by members of the Lex Mundi project and HG.org group,

→ confirm the model prediction across identification strategies.

→ show the inconsistency of predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Remainder of the Class.

– Guerriero (2017):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Either Exogenous (Financial Inefficiencies) or Endogenous Transaction Costs (Market Power, Lemons-type Distortions, Incomplete Contracting).

Further Evidence: Are Correlations, in Fact, Causal?

– Guerriero (2016):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Preference Heterogeneity.

Further Evidence: Are Correlations, in Fact, Causal?

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Remainder of the Class.

– Guerriero (2017):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Either Exogenous (Financial Inefficiencies) or Endogenous Transaction Costs (Market Power, Lemons-type Distortions, Incomplete Contracting).

Further Evidence: Are Correlations, in Fact, Causal?

– Guerriero (2016):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Preference Heterogeneity.

Further Evidence: Are Correlations, in Fact, Causal?

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Remainder of the Class.

– Guerriero (2017):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Either Exogenous (Financial Inefficiencies) or Endogenous Transaction Costs (Market Power, Lemons-type Distortions, Incomplete Contracting).

Further Evidence: Are Correlations, in Fact, Causal?

– Guerriero (2016):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Preference Heterogeneity.

Further Evidence: Are Correlations, in Fact, Causal?

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Remainder of the Class.

– Guerriero (2017):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Either Exogenous (Financial Inefficiencies) or Endogenous Transaction Costs (Market Power, Lemons-type Distortions, Incomplete Contracting).

Further Evidence: Are Correlations, in Fact, Causal?

– Guerriero (2016):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Preference Heterogeneity.

Further Evidence: Are Correlations, in Fact, Causal?

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Remainder of the Class.

– Guerriero (2017):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Either Exogenous (Financial Inefficiencies) or Endogenous Transaction Costs (Market Power, Lemons-type Distortions, Incomplete Contracting).

Further Evidence: Are Correlations, in Fact, Causal?

– Guerriero (2016):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Preference Heterogeneity.

Further Evidence: Are Correlations, in Fact, Causal?

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Research Question.

Remainder of the Class.

– Guerriero (2017):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Either Exogenous (Financial Inefficiencies) or Endogenous Transaction Costs (Market Power, Lemons-type Distortions, Incomplete Contracting).

Further Evidence: Are Correlations, in Fact, Causal?

– Guerriero (2016):

Preliminary Evidence: Stylized Facts.

Theory: Property Rights and Preference Heterogeneity.

Further Evidence: Are Correlations, in Fact, Causal?

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Guerriero (2017): Property Rights,

Transaction Costs, and the Limits of the Market.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Anecdotal . . .

– Frictions: the cost of eviction or the inability to provide a sufficient supply of housing because of regulatory requirements and speculative land-holding are the most recurring justifications to the tolerance towards the 40% of private lands invaded in developing countries and the two billion squatters estimated around the world (Brueckner and Selod, 2009).

– Frictions: exhaustion of intellectual property rights has been mainly implemented in high-transaction costs developing countries (Ghosh, 2014).

– Frictions: Piazzesi et al. (2017) conclude that financial costs explain 14% of the price gap between first and secondary housing market segments.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Anecdotal . . .

– Frictions: the cost of eviction or the inability to provide a sufficient supply of housing because of regulatory requirements and speculative land-holding are the most recurring justifications to the tolerance towards the 40% of private lands invaded in developing countries and the two billion squatters estimated around the world (Brueckner and Selod, 2009).

– Frictions: exhaustion of intellectual property rights has been mainly implemented in high-transaction costs developing countries (Ghosh, 2014).

– Frictions: Piazzesi et al. (2017) conclude that financial costs explain 14% of the price gap between first and secondary housing market segments.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Anecdotal . . .

– Frictions: the cost of eviction or the inability to provide a sufficient supply of housing because of regulatory requirements and speculative land-holding are the most recurring justifications to the tolerance towards the 40% of private lands invaded in developing countries and the two billion squatters estimated around the world (Brueckner and Selod, 2009).

– Frictions: exhaustion of intellectual property rights has been mainly implemented in high-transaction costs developing countries (Ghosh, 2014).

– Frictions: Piazzesi et al. (2017) conclude that financial costs explain 14% of the price gap between first and secondary housing market segments.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Evidence and . . .

– Market power: Common access to the fishing harvest together with individual transferable quotas is more often observed in Nova Scotia and New Zealand where the fishermen’s market power is the strongest (Croutzet and Lasserre, 2017). Similarly, Article 31 of the TRIPS agreement allows the participants to impose compulsory licensing if the commercial terms for a voluntary license are unreasonable (Bond and Saggi, 2017).

– Lemons-type distortions: Lee (2016) builds on 2008 data on BitTorrent file sharing activity and album sales to conclude that the former has no impact (a positive effect) on top(mid)-tier artists’ sales for which asymmetric information on perceived talent is the least (most) detrimental.

– Incomplete contracting costs: stronger downstream firm’s intellectual property rights—i.e., trade secrecy and copyright instead of patents—are granted when asset specificities are severe (Burk and Mc-Donnel, 2007).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Evidence and . . .

– Market power: Common access to the fishing harvest together with individual transferable quotas is more often observed in Nova Scotia and New Zealand where the fishermen’s market power is the strongest (Croutzet and Lasserre, 2017). Similarly, Article 31 of the TRIPS agreement allows the participants to impose compulsory licensing if the commercial terms for a voluntary license are unreasonable (Bond and Saggi, 2017).

– Lemons-type distortions: Lee (2016) builds on 2008 data on BitTorrent file sharing activity and album sales to conclude that the former has no impact (a positive effect) on top(mid)-tier artists’ sales for which asymmetric information on perceived talent is the least (most) detrimental.

– Incomplete contracting costs: stronger downstream firm’s intellectual property rights—i.e., trade secrecy and copyright instead of patents—are granted when asset specificities are severe (Burk and Mc-Donnel, 2007).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Evidence and . . .

– Market power: Common access to the fishing harvest together with individual transferable quotas is more often observed in Nova Scotia and New Zealand where the fishermen’s market power is the strongest (Croutzet and Lasserre, 2017). Similarly, Article 31 of the TRIPS agreement allows the participants to impose compulsory licensing if the commercial terms for a voluntary license are unreasonable (Bond and Saggi, 2017).

– Lemons-type distortions: Lee (2016) builds on 2008 data on BitTorrent file sharing activity and album sales to conclude that the former has no impact (a positive effect) on top(mid)-tier artists’ sales for which asymmetric information on perceived talent is the least (most) detrimental.

– Incomplete contracting costs: stronger downstream firm’s intellectual property rights—i.e., trade secrecy and copyright instead of patents—are granted when asset specificities are severe (Burk and Mc-Donnel, 2007).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

. . . Empirical Evidence on . . .

Executive Opinion Survey, World Economic Forum. 1-to-7 indexes:

– Property-Rights: on generic property including financial assets.

– Intellectual-Property: including anti-counterfeiting measures.

– Shareholders-Protection: to what extent are the interests of minority shareholders protected by the legal system.

Weakness of Property Rights

The evidence is similar when property rights are measured by the available objective proxies for horizontal property rights, i.e., length of adverse possession of personal property and the DBP investor protection index.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

. . . Empirical Evidence on . . .

Executive Opinion Survey, World Economic Forum. 1-to-7 indexes:

– Property-Rights: on generic property including financial assets.

– Intellectual-Property: including anti-counterfeiting measures.

– Shareholders-Protection: to what extent are the interests of minority shareholders protected by the legal system.

Weakness of Property Rights

The evidence is similar when property rights are measured by the available objective proxies for horizontal property rights, i.e., length of adverse possession of personal property and the DBP investor protection index.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

. . . Empirical Evidence on . . .

Executive Opinion Survey, World Economic Forum. 1-to-7 indexes:

– Property-Rights: on generic property including financial assets.

– Intellectual-Property: including anti-counterfeiting measures.

– Shareholders-Protection: to what extent are the interests of minority shareholders protected by the legal system.

Weakness of Property Rights

The evidence is similar when property rights are measured by the available objective proxies for horizontal property rights, i.e., length of adverse possession of personal property and the DBP investor protection index.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

. . . Empirical Evidence on . . .

Executive Opinion Survey, World Economic Forum. 1-to-7 indexes:

– Property-Rights: on generic property including financial assets.

– Intellectual-Property: including anti-counterfeiting measures.

– Shareholders-Protection: to what extent are the interests of minority shareholders protected by the legal system.

Weakness of Property Rights

The evidence is similar when property rights are measured by the available objective proxies for horizontal property rights, i.e., length of adverse possession of personal property and the DBP investor protection index.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Property Rights and Financial Inefficiencies, . . .

Unavailability-Financing: financial sector difficulties in providing products and services (1-to-7). Panel of 135 countries spanning the 2006-2015 period for which I observe all extra controls I use in the empirical exercise.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Private Rights and Market Power, . . .

Market-Dominance: lack of competitiveness of corporate activity (1-to-7).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Private Rights and Lemons-type Distortions, . . .

Asymmetric-Information: falling with the information used by buyers to buy (1-to-7), e.g., 1 = sophisticated analysis of attributes; 7 = lowest price.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Property Rights, Transaction Costs, and the Limits of the Market.

Private Rights and Incomplete Contracting Costs.

Asset-Specificities: competitive advantage in international markets (1-to-7), e.g., 1 = low cost labor/natural resources; 7 = unique products and processes. Property rights are assigned to the downstream firms, which provide the main productive resources [Burk and McDonnel 2007, p. 594].

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Exogenous Transaction Costs: Preferences . . .

Society is composed by a mass one of original owners and a mass one of potential buyers, all having linear utility over a good x.

While original owners value x at v > 0, potential buyers have a valuation λ uniformly distributed over

[ λ, λ

] with l ≡ λ−λ, λ > v > λ, and λm ≡ λ+λ2 .

Each buyer can either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min

{ v, λ− v

} with no social value, e.g.,

bargaining and financial costs, costs of legalizing the transfer and due to excessive regulation and/or bribery, mark-up of a foreign intermediary.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Exogenous Transaction Costs: Preferences . . .

Society is composed by a mass one of original owners and a mass one of potential buyers, all having linear utility over a good x.

While original owners value x at v > 0, potential buyers have a valuation λ uniformly distributed over

[ λ, λ

] with l ≡ λ−λ, λ > v > λ, and λm ≡ λ+λ2 .

Each buyer can either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min

{ v, λ− v

} with no social value, e.g.,

bargaining and financial costs, costs of legalizing the transfer and due to excessive regulation and/or bribery, mark-up of a foreign intermediary.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Exogenous Transaction Costs: Preferences . . .

Society is composed by a mass one of original owners and a mass one of potential buyers, all having linear utility over a good x.

While original owners value x at v > 0, potential buyers have a valuation λ uniformly distributed over

[ λ, λ

] with l ≡ λ−λ, λ > v > λ, and λm ≡ λ+λ2 .

Each buyer can either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min

{ v, λ− v

} with no social value, e.g.,

bargaining and financial costs, costs of legalizing the transfer and due to excessive regulation and/or bribery, mark-up of a foreign intermediary.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands, public enforcement, and the length of adverse possession.

Interpretation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands, public enforcement, and the length of adverse possession.

Interpretation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands, public enforcement, and the length of adverse possession.

Interpretation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands, public enforcement, and the length of adverse possession.

Interpretation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands, public enforcement, and the length of adverse possession.

Interpretation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Socially Optimal Property Rights: Solution and . . .

A potential buyer buys (expropriates) if λ− v− α > (1− γ)λ↔ λ ≥ λ̂ ≡ v+α γ (otherwise). Hence, the optimal γ

∗ maximizes the concave function

∫ λ λ̂

λ−α l dλ+

∫ λ̂ λ

(1−γ)λ+γv l dλ,

for λ̂ < λ and (1− γ)λm + γv ≡ WFE otherwise.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, an interior γ∗ ∈ (

v+α λ , 1 ]

is defined by

(γ∗) 2

= v 2−α2

λ(2v−λ) ,

and it is an equilibrium provided that the social welfare is higher at this value than it is at 0. The former is indeed the case for α sufficiently small.

Proposition 1: Property rights γ∗ weakly fall with the transaction costs α.

Intuition : a rise in α has the marginal effect of inefficiently pushing some high-λ buyers to expropriate x and the infra-marginal effect of decreasing the social gain from the transfers that continue to be consensual.

General Probability Density Functions

Alternative Assumptions

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, an interior γ∗ ∈ (

v+α λ , 1 ]

is defined by

(γ∗) 2

= v 2−α2

λ(2v−λ) ,

and it is an equilibrium provided that the social welfare is higher at this value than it is at 0. The former is indeed the case for α sufficiently small.

Proposition 1: Property rights γ∗ weakly fall with the transaction costs α.

Intuition : a rise in α has the marginal effect of inefficiently pushing some high-λ buyers to expropriate x and the infra-marginal effect of decreasing the social gain from the transfers that continue to be consensual.

General Probability Density Functions

Alternative Assumptions

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Exogenous Transaction Costs.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, an interior γ∗ ∈ (

v+α λ , 1 ]

is defined by

(γ∗) 2

= v 2−α2

λ(2v−λ) ,

and it is an equilibrium provided that the social welfare is higher at this value than it is at 0. The former is indeed the case for α sufficiently small.

Proposition 1: Property rights γ∗ weakly fall with the transaction costs α.

Intuition : a rise in α has the marginal effect of inefficiently pushing some high-λ buyers to expropriate x and the infra-marginal effect of decreasing the social gain from the transfers that continue to be consensual.

General Probability Density Functions

Alternative Assumptions

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Market Power.

α is a mark-up selected by original owners between t1 and t2 and maximizes

(v+α)(λ−λ̂) l + γ

∗v ( λ̂−λ)

l ,

for v+αγ∗ = λ̂ < λ. Then, α ∗ =

γ∗(λ+v) 2 − v and

dλ̂ dγ∗ = 0. Society values the

original owners’ profits and thus maximizes ∫ λ λ̂

λ l dλ+

∫ λ̂ λ

(1−γ)λ+γv l dλ→

for v ≥ λm → γ∗ = 1; for v < λm, γ∗ jumps from 0 to 1 as α∗ gets small.

Proposition 2: γ∗ weakly falls with the mark-up α∗, which in turn increases with the dispersion in the traders’ valuations λ− v.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Market Power.

α is a mark-up selected by original owners between t1 and t2 and maximizes

(v+α)(λ−λ̂) l + γ

∗v ( λ̂−λ)

l ,

for v+αγ∗ = λ̂ < λ. Then, α ∗ =

γ∗(λ+v) 2 − v and

dλ̂ dγ∗ = 0. Society values the

original owners’ profits and thus maximizes ∫ λ λ̂

λ l dλ+

∫ λ̂ λ

(1−γ)λ+γv l dλ→

for v ≥ λm → γ∗ = 1; for v < λm, γ∗ jumps from 0 to 1 as α∗ gets small.

Proposition 2: γ∗ weakly falls with the mark-up α∗, which in turn increases with the dispersion in the traders’ valuations λ− v.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Lemons-type Distortions.

– Original owners have private information on their valuation v ∼ U [ 0, λ ] .

v is correlated with λ. 1−∆ > 0 potential buyers value x at αv, ∆/2 have valuation θv, and the remainder gain v/θ with θ > 2 > α > 1.

– At the exogenous pL, potential buyers’ gain pL/2 and thus γ∗ maximizes θλm

∆ 2 + (1−∆) [(1− γ)αλm + γλm] +

[ (1− γ) λmθ + γλm

] ∆ 2 , for

γ∗ ≥ 2θ and (1− γ) [ (1−∆)α+ θ

2+1 θ

∆ 2

] λm + γλm otherwise. γ∗ can

jump from 0 to 1 when α and 1−∆ become sufficiently small.

Proposition 3: γ∗ weakly falls with the lemon-type distortions α, which in turn rise with the dispersion in the traders’ valuations.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Lemons-type Distortions.

– Original owners have private information on their valuation v ∼ U [ 0, λ ] .

v is correlated with λ. 1−∆ > 0 potential buyers value x at αv, ∆/2 have valuation θv, and the remainder gain v/θ with θ > 2 > α > 1.

– At the exogenous pL, potential buyers’ gain pL/2 and thus γ∗ maximizes θλm

∆ 2 + (1−∆) [(1− γ)αλm + γλm] +

[ (1− γ) λmθ + γλm

] ∆ 2 , for

γ∗ ≥ 2θ and (1− γ) [ (1−∆)α+ θ

2+1 θ

∆ 2

] λm + γλm otherwise. γ∗ can

jump from 0 to 1 when α and 1−∆ become sufficiently small.

Proposition 3: γ∗ weakly falls with the lemon-type distortions α, which in turn rise with the dispersion in the traders’ valuations.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Lemons-type Distortions.

– Original owners have private information on their valuation v ∼ U [ 0, λ ] .

v is correlated with λ. 1−∆ > 0 potential buyers value x at αv, ∆/2 have valuation θv, and the remainder gain v/θ with θ > 2 > α > 1.

– At the exogenous pL, potential buyers’ gain pL/2 and thus γ∗ maximizes θλm

∆ 2 + (1−∆) [(1− γ)αλm + γλm] +

[ (1− γ) λmθ + γλm

] ∆ 2 , for

γ∗ ≥ 2θ and (1− γ) [ (1−∆)α+ θ

2+1 θ

∆ 2

] λm + γλm otherwise. γ∗ can

jump from 0 to 1 when α and 1−∆ become sufficiently small.

Proposition 3: γ∗ weakly falls with the lemon-type distortions α, which in turn rise with the dispersion in the traders’ valuations.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Incomplete Contracting Costs: . . .

Society is divided in a mass 1 of upstream firms and a mass 1 of downstream ones. The latter can employ two technologies to produce x, i.e., the

1. “old” one does not need any input from the upstream firm and produces δλ with δ < 1 and λ again uniformly distributed over

[ λ, λ

] .

2. “new” one delivers λ and requires first (then) a downstream (upstream) firm’s input costing v (0 with odds 0 < α < 1 and (1− δ)λ o/w).

– Costs and payoffs are unverifiable and ex ante non contractible. Only the input cost is ex post non contractible.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Property Rights and Incomplete Contracting Costs: . . .

Society is divided in a mass 1 of upstream firms and a mass 1 of downstream ones. The latter can employ two technologies to produce x, i.e., the

1. “old” one does not need any input from the upstream firm and produces δλ with δ < 1 and λ again uniformly distributed over

[ λ, λ

] .

2. “new” one delivers λ and requires first (then) a downstream (upstream) firm’s input costing v (0 with odds 0 < α < 1 and (1− δ)λ o/w).

– Costs and payoffs are unverifiable and ex ante non contractible. Only the input cost is ex post non contractible.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Set up and . . .

t0 γ is the probability that in t2 a court allows the upstream firm to charge the inflated cost after the lawsuit launched by the downstream firm (Gennaioli, 2013). γ again maximizes the social welfare.

t1 Each downstream firm selects the technology. If the old one is employed, production is immediate. Otherwise, she is matched to an upstream firm and they sign a contract such that in t2 he has residual rights on his input and all bargaining power at renegotiation.

t2 After the preliminary phase, the input cost is realized and the upstream firm makes his request. Next, the downstream firm either accepts, turns to the old technology, or exploits the available legal remedies.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Set up and . . .

t0 γ is the probability that in t2 a court allows the upstream firm to charge the inflated cost after the lawsuit launched by the downstream firm (Gennaioli, 2013). γ again maximizes the social welfare.

t1 Each downstream firm selects the technology. If the old one is employed, production is immediate. Otherwise, she is matched to an upstream firm and they sign a contract such that in t2 he has residual rights on his input and all bargaining power at renegotiation.

t2 After the preliminary phase, the input cost is realized and the upstream firm makes his request. Next, the downstream firm either accepts, turns to the old technology, or exploits the available legal remedies.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Set up and . . .

t0 γ is the probability that in t2 a court allows the upstream firm to charge the inflated cost after the lawsuit launched by the downstream firm (Gennaioli, 2013). γ again maximizes the social welfare.

t1 Each downstream firm selects the technology. If the old one is employed, production is immediate. Otherwise, she is matched to an upstream firm and they sign a contract such that in t2 he has residual rights on his input and all bargaining power at renegotiation.

t2 After the preliminary phase, the input cost is realized and the upstream firm makes his request. Next, the downstream firm either accepts, turns to the old technology, or exploits the available legal remedies.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Equilibrium.

γ∗ = 1→ innovation fails because of a hold-up failure. For γ∗ < 1 instead, the downstream firm innovates for λ ≥ λ̂ ≡ v(1−δ)(1−γ) , the upstream one produces if γ∗ ≥ 1− α, and for λ̂ < λ society maximizes the function

α ∫ λ λ̂

λ−v l dλ+ (1− α)

∫ λ λ̂

δλ−v l dλ+

∫ λ̂ λ

δλ l dλ,

falling with γ ≥ 1− α. γ∗ = 1− α and the equilibrium is ex-ante efficient.

Proposition 4: γ∗ fall with the incomplete contracting costs α, which in turn gage the likelihood that the new technology is more productive.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Equilibrium.

γ∗ = 1→ innovation fails because of a hold-up failure. For γ∗ < 1 instead, the downstream firm innovates for λ ≥ λ̂ ≡ v(1−δ)(1−γ) , the upstream one produces if γ∗ ≥ 1− α, and for λ̂ < λ society maximizes the function

α ∫ λ λ̂

λ−v l dλ+ (1− α)

∫ λ λ̂

δλ−v l dλ+

∫ λ̂ λ

δλ l dλ,

falling with γ ≥ 1− α. γ∗ = 1− α and the equilibrium is ex-ante efficient.

Proposition 4: γ∗ fall with the incomplete contracting costs α, which in turn gage the likelihood that the new technology is more productive.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Robustness Checks.

– Political Economy

– Production

– Investment

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Robustness Checks.

– Political Economy

– Production

– Investment

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Robustness Checks.

– Political Economy

– Production

– Investment

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Model Implications.

Testable Predictions: 1. The strength of the original owners’ property rights falls with

market frictions and failures, whereas the strength of the upstream firms decreases with incomplete contracting costs.

2. Market power and lemons-type distortions rise with the traders’ valuation dispersion, while the severity of asset specificities increases with the likelihood of a more productive technology.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Model Implications.

Testable Predictions: 1. The strength of the original owners’ property rights falls with

market frictions and failures, whereas the strength of the upstream firms decreases with incomplete contracting costs.

2. Market power and lemons-type distortions rise with the traders’ valuation dispersion, while the severity of asset specificities increases with the likelihood of a more productive technology.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Measurement.

– The gist of the empirical exercise is the same when I proxy:

transaction costs with either the burden of administrative requirements on firms—i.e., Over-Regulation—or the impact of non-tariff barriers on competitiveness of imported goods, i.e., Trade-Barriers.

market frictions and failures (asset specificities) with the necessity of bribery, firms’ difficulty to obtain a bank loan, firms’ hurdle to issue shares, or the lack of competitiveness of local markets (extent of production sophistication and of relationship-specificity).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Measurement.

– The gist of the empirical exercise is the same when I proxy:

transaction costs with either the burden of administrative requirements on firms—i.e., Over-Regulation—or the impact of non-tariff barriers on competitiveness of imported goods, i.e., Trade-Barriers.

market frictions and failures (asset specificities) with the necessity of bribery, firms’ difficulty to obtain a bank loan, firms’ hurdle to issue shares, or the lack of competitiveness of local markets (extent of production sophistication and of relationship-specificity).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Measurement.

– The gist of the empirical exercise is the same when I proxy:

transaction costs with either the burden of administrative requirements on firms—i.e., Over-Regulation—or the impact of non-tariff barriers on competitiveness of imported goods, i.e., Trade-Barriers.

market frictions and failures (asset specificities) with the necessity of bribery, firms’ difficulty to obtain a bank loan, firms’ hurdle to issue shares, or the lack of competitiveness of local markets (extent of production sophistication and of relationship-specificity).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Empirical Strategy: OLS, . . .

Table 3 OLS controlling only for fixed country and year effects entail that a one-sd rise in Unavailability-Financing, Market-Dominance, or Asymmetric-Information (Asset-Specificities), which is 1 (0.9), implies a 0.3(0.4)-sd—i.e., 1—fall (rise) in the strength of property rights.

Endogeneity? OLS estimates may be capturing reverse causality, may be driven by the confounding effect of relevant omitted variables, or may be attenuated by the error in the measurement of transaction costs.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Empirical Strategy: OLS, . . .

Table 3 OLS controlling only for fixed country and year effects entail that a one-sd rise in Unavailability-Financing, Market-Dominance, or Asymmetric-Information (Asset-Specificities), which is 1 (0.9), implies a 0.3(0.4)-sd—i.e., 1—fall (rise) in the strength of property rights.

Endogeneity? OLS estimates may be capturing reverse causality, may be driven by the confounding effect of relevant omitted variables, or may be attenuated by the error in the measurement of transaction costs.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Controlling for Observables, and . . .

Table 4 OLS controlling contemporaneously for Income, Democracy, Reserves, Conflict-External, Conflict-Internal, and Human-Capital over and above fixed country and time effects. The extra controls also take into account preference diversity (Guerriero, 2016).

– The Internet appendix (evidence available upon request) shows that analysis is robust to considering Culture and Enforcement to evaluate the incentives of intermediaries as in Dari-Mattiacci and Guerriero (2015) (including all proxies for transaction costs).

Table 5 To attribute the entire estimates to unobservables, the influence of unobservables would have to be on average 60 times greater than that of all observables (Altonji, Elder, and Taber, 2005). Selection

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Controlling for Observables, and . . .

Table 4 OLS controlling contemporaneously for Income, Democracy, Reserves, Conflict-External, Conflict-Internal, and Human-Capital over and above fixed country and time effects. The extra controls also take into account preference diversity (Guerriero, 2016).

– The Internet appendix (evidence available upon request) shows that analysis is robust to considering Culture and Enforcement to evaluate the incentives of intermediaries as in Dari-Mattiacci and Guerriero (2015) (including all proxies for transaction costs).

Table 5 To attribute the entire estimates to unobservables, the influence of unobservables would have to be on average 60 times greater than that of all observables (Altonji, Elder, and Taber, 2005). Selection

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

Controlling for Observables, and . . .

Table 4 OLS controlling contemporaneously for Income, Democracy, Reserves, Conflict-External, Conflict-Internal, and Human-Capital over and above fixed country and time effects. The extra controls also take into account preference diversity (Guerriero, 2016).

– The Internet appendix (evidence available upon request) shows that analysis is robust to considering Culture and Enforcement to evaluate the incentives of intermediaries as in Dari-Mattiacci and Guerriero (2015) (including all proxies for transaction costs).

Table 5 To attribute the entire estimates to unobservables, the influence of unobservables would have to be on average 60 times greater than that of all observables (Altonji, Elder, and Taber, 2005). Selection

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

2SLS.

Table 6 I document strong negative (positive) first-stages between the extent of market power and lemons-type distortions (asset specificities) and proxies for both the availability of the latest technology and the quality of math and science education (see Añón Higón et al., [2017]).

– Conditional on all observables, 2SLS are similar to OLS estimates and the exclusion restriction is vindicated by under-identification test, test of overidentifying restrictions, and semi reduced-forms.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Empirical Approach.

2SLS.

Table 6 I document strong negative (positive) first-stages between the extent of market power and lemons-type distortions (asset specificities) and proxies for both the availability of the latest technology and the quality of math and science education (see Añón Higón et al., [2017]).

– Conditional on all observables, 2SLS are similar to OLS estimates and the exclusion restriction is vindicated by under-identification test, test of overidentifying restrictions, and semi reduced-forms.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Future Research.

Directions for Future Research.

– Legal variation is relevant since special interests can distort the design of property rights away from optimality if not fully democratic.

– Weak property rights are society’s response to sizable market frictions and failures (asset specificities), which are driven by the dispersion in the traders’ valuations (likelihood of innovation), and thus their negative correlation with outcomes might be—partly—spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Future Research.

Directions for Future Research.

– Legal variation is relevant since special interests can distort the design of property rights away from optimality if not fully democratic.

– Weak property rights are society’s response to sizable market frictions and failures (asset specificities), which are driven by the dispersion in the traders’ valuations (likelihood of innovation), and thus their negative correlation with outcomes might be—partly—spurious.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Property Rights.

Guerriero (2016): Endogenous Property Rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Property Rights.

Anecdotal and . . .

– Movables: local politicians in India have been defending the massive postwar condoning of power thefts by the rural population as an attempt to avoid that the homogeneous subsistence farming would be destroyed if electricity invoices were collected (Charnoz and Swain 2012).

– Immovables: in the last two decades, the restitution of the lands confiscated by the communist regimes in the former Eastern Bloc has been more limited where farming was more homogeneous, e.g., Albania (Bejtja and Bejtja 2014). Here, present-day owners would bear large losses if dispossessed because of the huge transaction costs of acquiring new plots.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Property Rights.

Anecdotal and . . .

– Movables: local politicians in India have been defending the massive postwar condoning of power thefts by the rural population as an attempt to avoid that the homogeneous subsistence farming would be destroyed if electricity invoices were collected (Charnoz and Swain 2012).

– Immovables: in the last two decades, the restitution of the lands confiscated by the communist regimes in the former Eastern Bloc has been more limited where farming was more homogeneous, e.g., Albania (Bejtja and Bejtja 2014). Here, present-day owners would bear large losses if dispossessed because of the huge transaction costs of acquiring new plots.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Property Rights.

Empirical Evidence on Weak Property Rights . . .

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Property Rights.

and Genetic Diversity.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Set Up: Preferences . . .

Society is composed by a mass one of original owners and a mass one of potential buyers, all having linear utility over a good x. While original owners value x at v > 0, potential buyers are heterogeneous—i.e.,

a share ∆/2 with ∆ ∈ (0, 1) values the good at λ > 0;

a share ∆/2 at λ > v > λ;

the remainder has a valuation λ uniformly distributed over [ λ, λ

] with

l ≡ λ− λ and λm ≡ ( λ+ λ

) /2 and thus a rise in ∆ implies a

mean-preserving spread of the λ distribution.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Set Up: Preferences . . .

Society is composed by a mass one of original owners and a mass one of potential buyers, all having linear utility over a good x. While original owners value x at v > 0, potential buyers are heterogeneous—i.e.,

a share ∆/2 with ∆ ∈ (0, 1) values the good at λ > 0;

a share ∆/2 at λ > v > λ;

the remainder has a valuation λ uniformly distributed over [ λ, λ

] with

l ≡ λ− λ and λm ≡ ( λ+ λ

) /2 and thus a rise in ∆ implies a

mean-preserving spread of the λ distribution.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers by an intermediation technology allowing each buyer to either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min {v, l− v} with no social value, e.g., financial or bargaining costs, and mark up of a foreign intermediary.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands and of public enforcement and the length of adverse possession.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers by an intermediation technology allowing each buyer to either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min {v, l− v} with no social value, e.g., financial or bargaining costs, and mark up of a foreign intermediary.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands and of public enforcement and the length of adverse possession.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers by an intermediation technology allowing each buyer to either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min {v, l− v} with no social value, e.g., financial or bargaining costs, and mark up of a foreign intermediary.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands and of public enforcement and the length of adverse possession.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

and Timing.

t0 Property rights γ are chosen to maximize the expected social welfare, which is the sum of original owners’ and potential buyers’ utilities.

t1 Individuals learn who they are and, in particular, their valuation.

t2 Original owners are randomly matched to potential buyers by an intermediation technology allowing each buyer to either expropriate her match at no cost or buy the good at v plus a transaction cost 0 < α < min {v, l− v} with no social value, e.g., financial or bargaining costs, and mark up of a foreign intermediary.

t3 An expropriated x is given back to its original owner with probability γ, which encapsulates the strength of the remedies in the original owner’s hands and of public enforcement and the length of adverse possession.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Socially Optimal Property Rights: Solution and . . .

A potential buyer buys (expropriates) if λ− v− α > (1− γ)λ↔ λ ≥ λ̂ ≡ v+αγ (otherwise). Therefore, the socially optimal γ

∗ maximizes

( λ− α

) ∆ 2 +(1−∆)

∫ λ λ̂

λ−α l dλ+(1−∆)

∫ λ̂ λ

(1−γ)λ+γv l dλ+

(1−γ)λ+γv 2 ∆,

if λ̂ < λ, and (1− γ)λm + γv ≡ WFE otherwise.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, the interior solution γ∗ ∈ (

v+α λ , 1 ]

defined by

(γ∗) 2

= ( v2 − α2

) [ vλ+ (v− λ)

( λ− l∆1−∆

)]−1 ,

is an equilibrium provided that the social welfare is higher at γ∗ than it is at 0. In particular, γ∗ > 0 for ∆ sufficiently high. Basic Intuition

Proposition: γ∗ weakly increases (decreases) with l and ∆ (α if interior).

– Related literature: patenting and dispersion of technological base (Hall and Harhoff, 2012); optimal taxation and heterogeneity (Diamond and Spinnewijn, 2012); theory of the firm (Williamson, 2010).

General Probability Density Functions

Heterogeneous original owners

Private sales

Costly expropriation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, the interior solution γ∗ ∈ (

v+α λ , 1 ]

defined by

(γ∗) 2

= ( v2 − α2

) [ vλ+ (v− λ)

( λ− l∆1−∆

)]−1 ,

is an equilibrium provided that the social welfare is higher at γ∗ than it is at 0. In particular, γ∗ > 0 for ∆ sufficiently high. Basic Intuition

Proposition: γ∗ weakly increases (decreases) with l and ∆ (α if interior).

– Related literature: patenting and dispersion of technological base (Hall and Harhoff, 2012); optimal taxation and heterogeneity (Diamond and Spinnewijn, 2012); theory of the firm (Williamson, 2010).

General Probability Density Functions

Heterogeneous original owners

Private sales

Costly expropriation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, the interior solution γ∗ ∈ (

v+α λ , 1 ]

defined by

(γ∗) 2

= ( v2 − α2

) [ vλ+ (v− λ)

( λ− l∆1−∆

)]−1 ,

is an equilibrium provided that the social welfare is higher at γ∗ than it is at 0. In particular, γ∗ > 0 for ∆ sufficiently high. Basic Intuition

Proposition: γ∗ weakly increases (decreases) with l and ∆ (α if interior).

– Related literature: patenting and dispersion of technological base (Hall and Harhoff, 2012); optimal taxation and heterogeneity (Diamond and Spinnewijn, 2012); theory of the firm (Williamson, 2010).

General Probability Density Functions

Heterogeneous original owners

Private sales

Costly expropriation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Comparative Statics.

If v ≥ λm, γ∗ = 1. If v < λm, the interior solution γ∗ ∈ (

v+α λ , 1 ]

defined by

(γ∗) 2

= ( v2 − α2

) [ vλ+ (v− λ)

( λ− l∆1−∆

)]−1 ,

is an equilibrium provided that the social welfare is higher at γ∗ than it is at 0. In particular, γ∗ > 0 for ∆ sufficiently high. Basic Intuition

Proposition: γ∗ weakly increases (decreases) with l and ∆ (α if interior).

– Related literature: patenting and dispersion of technological base (Hall and Harhoff, 2012); optimal taxation and heterogeneity (Diamond and Spinnewijn, 2012); theory of the firm (Williamson, 2010).

General Probability Density Functions

Heterogeneous original owners

Private sales

Costly expropriation

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

Socially Optimal Property Rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

The Political Economy of Property Rights Protection.

A minority of “insiders” chooses γ∗. Focus on the group formed by the original owners and the buyers with λ ∈

[ λ+ �, λ

] and thus γ∗ maximizes(

λ− α )

∆ 2 +(1−∆)

∫ λ λ̂

λ−α l dλ+(1−∆)

∫ λ̂ λ+�

(1−γ)λ+γv l dλ+γv

( ∆ 2 +

� l

) ,

for λ̂ < λ, and WFE − 1−γ2 [ (1−∆) �

2+2�λ l + λ∆

] otherwise.

γ∗ is still weakly increasing with ∆ for � not too small but is set inefficiently high by individuals who do not face uncertainty, e.g., Zamindari system of land taxation allowing Indian landowners to expropriate from evading tenants who are often more productive (Besley and Ghatak, 2010).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

The Political Economy of Property Rights Protection.

A minority of “insiders” chooses γ∗. Focus on the group formed by the original owners and the buyers with λ ∈

[ λ+ �, λ

] and thus γ∗ maximizes(

λ− α )

∆ 2 +(1−∆)

∫ λ λ̂

λ−α l dλ+(1−∆)

∫ λ̂ λ+�

(1−γ)λ+γv l dλ+γv

( ∆ 2 +

� l

) ,

for λ̂ < λ, and WFE − 1−γ2 [ (1−∆) �

2+2�λ l + λ∆

] otherwise.

γ∗ is still weakly increasing with ∆ for � not too small but is set inefficiently high by individuals who do not face uncertainty, e.g., Zamindari system of land taxation allowing Indian landowners to expropriate from evading tenants who are often more productive (Besley and Ghatak, 2010).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Inefficient Expropriation Versus Inefficient Exclusion from Trade.

The Political Economy of Property Rights Protection.

A minority of “insiders” chooses γ∗. Focus on the group formed by the original owners and the buyers with λ ∈

[ λ+ �, λ

] and thus γ∗ maximizes(

λ− α )

∆ 2 +(1−∆)

∫ λ λ̂

λ−α l dλ+(1−∆)

∫ λ̂ λ+�

(1−γ)λ+γv l dλ+γv

( ∆ 2 +

� l

) ,

for λ̂ < λ, and WFE − 1−γ2 [ (1−∆) �

2+2�λ l + λ∆

] otherwise.

γ∗ is still weakly increasing with ∆ for � not too small but is set inefficiently high by individuals who do not face uncertainty, e.g., Zamindari system of land taxation allowing Indian landowners to expropriate from evading tenants who are often more productive (Besley and Ghatak, 2010).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

More General Market Structures.

α = βδ where β is a mark up selected by original owners between t1 and t2 and δ an inverse measure of market competitiveness. β∗ maximizes

(v + βδ) ∆2 + (1−∆) (v+βδ)(λ−λ̂)

l + (1−∆) γ ∗v (

λ̂−λ) l + γ

∗v ∆2 ,

for v+βδγ∗ = λ̂ < λ and γ ∗v otherwise. β∗δ = γ

∗l∆ 4(1−∆) +

γ∗λ 2 −

v(2−γ∗) 2 for

λ̂ < λ and 0 o/w. dλ̂dγ = 0 and society considers the original owners’ profits.

If v ≥ λm, then γ∗ = 1. If v < λm, then γ∗ jumps from 0 to 1 for ∆ large.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

More General Market Structures.

α = βδ where β is a mark up selected by original owners between t1 and t2 and δ an inverse measure of market competitiveness. β∗ maximizes

(v + βδ) ∆2 + (1−∆) (v+βδ)(λ−λ̂)

l + (1−∆) γ ∗v (

λ̂−λ) l + γ

∗v ∆2 ,

for v+βδγ∗ = λ̂ < λ and γ ∗v otherwise. β∗δ = γ

∗l∆ 4(1−∆) +

γ∗λ 2 −

v(2−γ∗) 2 for

λ̂ < λ and 0 o/w. dλ̂dγ = 0 and society considers the original owners’ profits.

If v ≥ λm, then γ∗ = 1. If v < λm, then γ∗ jumps from 0 to 1 for ∆ large.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Market for Lemons (Hasen and McAdams, 1997).

Original owners have private information on their valuation v, which is drawn from an uniform distribution with support

[ λ, λ

] and correlated to the

potential buyers’ one. 1−∆ potential buyers value x at v + µ with 0 < µ < (θ − 1) v and θ > 2, ∆/2 value x at θv, and the remainder v/θ.

The exogenously fixed price pL < 2µ implies that buyers infer that the expected value of x is pL/2 since the owner sells only if v ≤ p. γ∗ maximizes

(1−∆) [ (1− γ)

( λ+λ

2 + µ )

+ γ(λ+λ)

2

] +

[ (1− γ) λ+λ2θ +

γ(λ+λ) 2

] ∆ 2 ,

for γ∗ ≥ 2θ and (1− γ) [ (1−∆)

( λ+λ

2 + µ )

+ θ 2+1 θ

( λ+λ

2

) ∆ 2

] + γ λ+λ2

otherwise. γ∗ can jump from 0 to 1 when ∆ is sufficiently large.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Endogenous Transaction Costs.

Market for Lemons (Hasen and McAdams, 1997).

Original owners have private information on their valuation v, which is drawn from an uniform distribution with support

[ λ, λ

] and correlated to the

potential buyers’ one. 1−∆ potential buyers value x at v + µ with 0 < µ < (θ − 1) v and θ > 2, ∆/2 value x at θv, and the remainder v/θ.

The exogenously fixed price pL < 2µ implies that buyers infer that the expected value of x is pL/2 since the owner sells only if v ≤ p. γ∗ maximizes

(1−∆) [ (1− γ)

( λ+λ

2 + µ )

+ γ(λ+λ)

2

] +

[ (1− γ) λ+λ2θ +

γ(λ+λ) 2

] ∆ 2 ,

for γ∗ ≥ 2θ and (1− γ) [ (1−∆)

( λ+λ

2 + µ )

+ θ 2+1 θ

( λ+λ

2

) ∆ 2

] + γ λ+λ2

otherwise. γ∗ can jump from 0 to 1 when ∆ is sufficiently large.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Property Vs. Liability Rules.

Buyers pay damages d to keep x when liabilities rules are applied. d equals λ with probability φ and v otherwise (Kaplow and Shavell, 1996).

λ̂R ≡ v+α−(1−γ)dγ , d = φλ+ (1− φ) v, γ ∗ maximizes

∫ λ̂R v

(1−γ)λ+γv l dλ+∫ λ

λ̂R λ−α

l dλ+ ∫ v λ

(1−γ)φλ+[(1−γ)(1−φ)+γ]v l dλ+

(1−γ)φλ+[(1−γ)(1−φ)+γ]v 2(1−∆) ∆,

if λ̂ < λR, and ∫ λ

v (1−γ)λ+γv

l dλ+ ∫ v λ

(1−γ)φλ+[(1−γ)(1−φ)+γ]v l dλ+

(1−γ)φλm+[(1−γ)(1−φ)+γ]v (1−∆) ∆ o/w. For v ≥ λm and both φ and ∆ sufficiently

large, γ∗ can jump from 0 to 1 (see also Bar-Gill and Persico, [2012]).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Property Vs. Liability Rules.

Buyers pay damages d to keep x when liabilities rules are applied. d equals λ with probability φ and v otherwise (Kaplow and Shavell, 1996).

λ̂R ≡ v+α−(1−γ)dγ , d = φλ+ (1− φ) v, γ ∗ maximizes

∫ λ̂R v

(1−γ)λ+γv l dλ+∫ λ

λ̂R λ−α

l dλ+ ∫ v λ

(1−γ)φλ+[(1−γ)(1−φ)+γ]v l dλ+

(1−γ)φλ+[(1−γ)(1−φ)+γ]v 2(1−∆) ∆,

if λ̂ < λR, and ∫ λ

v (1−γ)λ+γv

l dλ+ ∫ v λ

(1−γ)φλ+[(1−γ)(1−φ)+γ]v l dλ+

(1−γ)φλm+[(1−γ)(1−φ)+γ]v (1−∆) ∆ o/w. For v ≥ λm and both φ and ∆ sufficiently

large, γ∗ can jump from 0 to 1 (see also Bar-Gill and Persico, [2012]).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Production.

Differently from the extant literature (Jordan, 2006; Piccione and Rubinstein, 2007; Bar-Gill and Persico, 2013), I prove that incomplete property rights can be optimal even if I introduce a production step between t1 and t2.

Production realizes if v ∆2 + (1−∆)v(λ−λ̂)

l + (1−∆)γ∗v(λ̂−λ)

l + γ ∗v ∆2 −κ ≥ 0,

where κ < v is the production cost. Since the original owner’s payoff strictly rises with γ, there is a γ̂, increasing with ∆ for λ sufficiently high, such that production realizes iff γ∗ ≥ γ̂. Being production valuable also for buyers,

society selects the maximum between γ̂ and the solution prevailing without production. γ∗ is raised to incentivate production and dγ

d∆ ≥ 0.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Production.

Differently from the extant literature (Jordan, 2006; Piccione and Rubinstein, 2007; Bar-Gill and Persico, 2013), I prove that incomplete property rights can be optimal even if I introduce a production step between t1 and t2.

Production realizes if v ∆2 + (1−∆)v(λ−λ̂)

l + (1−∆)γ∗v(λ̂−λ)

l + γ ∗v ∆2 −κ ≥ 0,

where κ < v is the production cost. Since the original owner’s payoff strictly rises with γ, there is a γ̂, increasing with ∆ for λ sufficiently high, such that production realizes iff γ∗ ≥ γ̂. Being production valuable also for buyers,

society selects the maximum between γ̂ and the solution prevailing without production. γ∗ is raised to incentivate production and dγ

d∆ ≥ 0.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Production.

Differently from the extant literature (Jordan, 2006; Piccione and Rubinstein, 2007; Bar-Gill and Persico, 2013), I prove that incomplete property rights can be optimal even if I introduce a production step between t1 and t2.

Production realizes if v ∆2 + (1−∆)v(λ−λ̂)

l + (1−∆)γ∗v(λ̂−λ)

l + γ ∗v ∆2 −κ ≥ 0,

where κ < v is the production cost. Since the original owner’s payoff strictly rises with γ, there is a γ̂, increasing with ∆ for λ sufficiently high, such that production realizes iff γ∗ ≥ γ̂. Being production valuable also for buyers,

society selects the maximum between γ̂ and the solution prevailing without production. γ∗ is raised to incentivate production and dγ

d∆ ≥ 0.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Investment.

Investment expenses

raising v to v (1 + ρ) with ρ < λ−v−αv at the fixed cost ζ < v;

– γ∗ is raised to incentivize investment and dγ ∗

d∆ ≥ 0.

increasing (decreasing) the probability that a potential buyer has valuation λ (λ) to ∆ (1 + ρ) (∆ (1− ρ)) at the fixed cost η < v;

– γ∗ is raised to incentivize investment and dγ ∗

d∆ ≥ 0.

allowing original owners to get a share ρ of α at the variable cost ρ2/2.

– The FOC equals that in the basic model except for a positive investment inducement term. For v < λm then, γ∗ can jump from 0 to a positive γ∗ higher than that prevailing without investment and rising with ∆ for ∆ large enough. If v ≥ λm, then γ∗ = 1.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Investment.

Investment expenses

raising v to v (1 + ρ) with ρ < λ−v−αv at the fixed cost ζ < v;

– γ∗ is raised to incentivize investment and dγ ∗

d∆ ≥ 0.

increasing (decreasing) the probability that a potential buyer has valuation λ (λ) to ∆ (1 + ρ) (∆ (1− ρ)) at the fixed cost η < v;

– γ∗ is raised to incentivize investment and dγ ∗

d∆ ≥ 0.

allowing original owners to get a share ρ of α at the variable cost ρ2/2.

– The FOC equals that in the basic model except for a positive investment inducement term. For v < λm then, γ∗ can jump from 0 to a positive γ∗ higher than that prevailing without investment and rising with ∆ for ∆ large enough. If v ≥ λm, then γ∗ = 1.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Robustness to Alternative Assumptions.

Investment.

Investment expenses

raising v to v (1 + ρ) with ρ < λ−v−αv at the fixed cost ζ < v;

– γ∗ is raised to incentivize investment and dγ ∗

d∆ ≥ 0.

increasing (decreasing) the probability that a potential buyer has valuation λ (λ) to ∆ (1 + ρ) (∆ (1− ρ)) at the fixed cost η < v;

– γ∗ is raised to incentivize investment and dγ ∗

d∆ ≥ 0.

allowing original owners to get a share ρ of α at the variable cost ρ2/2.

– The FOC equals that in the basic model except for a positive investment inducement term. For v < λm then, γ∗ can jump from 0 to a positive γ∗ higher than that prevailing without investment and rising with ∆ for ∆ large enough. If v ≥ λm, then γ∗ = 1.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Measuring Property Rights.

GDM and I sent questionnaires to LEX-MUNDI and HG.org lawyers, and prominent law professors in 126 jurisdictions and obtained the variables:

– AP-Movable—Number of years after which a good-faith possessor of a movable good acquires ownership, max 30;

– AP-Immovable—Number of years necessary for adverse possession with good faith but without title if the adverse possessor prevails against a good-faith buyer from the original owner or registration is compulsory for adverse possession; 30 otherwise;

← conflict between a good-faith possessor without title and third party buying from owner after adverse possession is expired.

– Government-Takings—Dummy equal to 1 if the state cannot take real property to transfer it to a private entity for private for-profit use.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Measuring Property Rights.

GDM and I sent questionnaires to LEX-MUNDI and HG.org lawyers, and prominent law professors in 126 jurisdictions and obtained the variables:

– AP-Movable—Number of years after which a good-faith possessor of a movable good acquires ownership, max 30;

– AP-Immovable—Number of years necessary for adverse possession with good faith but without title if the adverse possessor prevails against a good-faith buyer from the original owner or registration is compulsory for adverse possession; 30 otherwise;

← conflict between a good-faith possessor without title and third party buying from owner after adverse possession is expired.

– Government-Takings—Dummy equal to 1 if the state cannot take real property to transfer it to a private entity for private for-profit use.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Measuring Property Rights.

GDM and I sent questionnaires to LEX-MUNDI and HG.org lawyers, and prominent law professors in 126 jurisdictions and obtained the variables:

– AP-Movable—Number of years after which a good-faith possessor of a movable good acquires ownership, max 30;

– AP-Immovable—Number of years necessary for adverse possession with good faith but without title if the adverse possessor prevails against a good-faith buyer from the original owner or registration is compulsory for adverse possession; 30 otherwise;

← conflict between a good-faith possessor without title and third party buying from owner after adverse possession is expired.

– Government-Takings—Dummy equal to 1 if the state cannot take real property to transfer it to a private entity for private for-profit use.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Measuring Preference Heterogeneity: Rationale and . . .

Genetic-Diversity-A: contemporary heterozygosity as predicted by migratory distance from East Africa and post-1500 population flows. Why?

– Genetic diversity within indigenous settlements is a primitive metrics of the genealogical distance between populations with a common ancestor and, so, of the average differences in preferences transmitted across generations (Cavalli-Sforza, Menozzi, and Piazza, 1994). Accordingly, it drives contemporaneous heterogeneities across genetic, ethnic, and linguistic groups (Ashraf and Galor, 2013).

– The exodus of the Homo sapiens out of East Africa occurred thousands of years ago in a series of stages such that new groups carried from initial colonies only a portion of their overall genetic diversity.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Measuring Preference Heterogeneity: Rationale and . . .

Genetic-Diversity-A: contemporary heterozygosity as predicted by migratory distance from East Africa and post-1500 population flows. Why?

– Genetic diversity within indigenous settlements is a primitive metrics of the genealogical distance between populations with a common ancestor and, so, of the average differences in preferences transmitted across generations (Cavalli-Sforza, Menozzi, and Piazza, 1994). Accordingly, it drives contemporaneous heterogeneities across genetic, ethnic, and linguistic groups (Ashraf and Galor, 2013).

– The exodus of the Homo sapiens out of East Africa occurred thousands of years ago in a series of stages such that new groups carried from initial colonies only a portion of their overall genetic diversity.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Robustness.

Table 7: The estimates are similar if I use instead of Genetic-Diversity-A:

– Genetic-Diversity, i.e., expected heterozygosity, as predicted by migratory distance from East Africa only (Ashraf and Galor, 2013);

– Language, i.e., ln of # languages (Michalopoulos, 2012);

– Ethnic, i.e., ethnic fractionalization (Alesina et al., 2003);

– Religion, i.e., religious fractionalization (Alesina et al., 2003).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Robustness.

Table 7: The estimates are similar if I use instead of Genetic-Diversity-A:

– Genetic-Diversity, i.e., expected heterozygosity, as predicted by migratory distance from East Africa only (Ashraf and Galor, 2013);

– Language, i.e., ln of # languages (Michalopoulos, 2012);

– Ethnic, i.e., ethnic fractionalization (Alesina et al., 2003);

– Religion, i.e., religious fractionalization (Alesina et al., 2003).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Robustness.

Table 7: The estimates are similar if I use instead of Genetic-Diversity-A:

– Genetic-Diversity, i.e., expected heterozygosity, as predicted by migratory distance from East Africa only (Ashraf and Galor, 2013);

– Language, i.e., ln of # languages (Michalopoulos, 2012);

– Ethnic, i.e., ethnic fractionalization (Alesina et al., 2003);

– Religion, i.e., religious fractionalization (Alesina et al., 2003).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Robustness.

Table 7: The estimates are similar if I use instead of Genetic-Diversity-A:

– Genetic-Diversity, i.e., expected heterozygosity, as predicted by migratory distance from East Africa only (Ashraf and Galor, 2013);

– Language, i.e., ln of # languages (Michalopoulos, 2012);

– Ethnic, i.e., ethnic fractionalization (Alesina et al., 2003);

– Religion, i.e., religious fractionalization (Alesina et al., 2003).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Empirical Strategy: OLS, . . .

Table 3: OLS without controls (on sample for which are all observed).

– Endogeneity? because of the primarily prehistoric origins of contemporary genetic pools, I can rule out reverse causation. Yet, the results might be driven by the confounding impact of the Europeans’ colonization strategy and/or by other determinants of property rights associated with diversity.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Empirical Strategy: OLS, . . .

Table 3: OLS without controls (on sample for which are all observed).

– Endogeneity? because of the primarily prehistoric origins of contemporary genetic pools, I can rule out reverse causation. Yet, the results might be driven by the confounding impact of the Europeans’ colonization strategy and/or by other determinants of property rights associated with diversity.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Robustness, . . .

1. Table 3: control stepwise or all together for: Pathogen-Load, Urbanization-1500, Colonization-Time; Population, Income; Neolithic, Democracy; Reserves, Conflict-E, Common-Law; Conflict-I; Land-Quality-SD, Ruggedness, Latitude; and in the Internet appendix Culture, Enforcement, Temperature, and Precipitation. Many of these observables control also for transaction costs.

2. Table 4: focus on jurisdictions where the majority of present-day inhabitants can trace their ancestry in 1500 to the same area.

3. Table 5: to attribute the entire estimate to unobserved heterogeneity, selection on unobservables needs to be on average 12 times greater than selection on all observables (Altonji, Elder, and Taber, 2005).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Robustness, . . .

1. Table 3: control stepwise or all together for: Pathogen-Load, Urbanization-1500, Colonization-Time; Population, Income; Neolithic, Democracy; Reserves, Conflict-E, Common-Law; Conflict-I; Land-Quality-SD, Ruggedness, Latitude; and in the Internet appendix Culture, Enforcement, Temperature, and Precipitation. Many of these observables control also for transaction costs.

2. Table 4: focus on jurisdictions where the majority of present-day inhabitants can trace their ancestry in 1500 to the same area.

3. Table 5: to attribute the entire estimate to unobserved heterogeneity, selection on unobservables needs to be on average 12 times greater than selection on all observables (Altonji, Elder, and Taber, 2005).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

2SLS (Table 6).

– Given the very plausible exogeneity of prehistoric migratory patterns with respect to unobservables, I use as excluded instrument:

Migratory-Distance.— Migratory distance from Addis Ababa in thousands of kilometers (Ashraf and Galor, 2013).

– 2SLS and OLS results are almost identical and I cannot reject that diversity is exogenous at a level lower than 5% when controlling for all observables.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

2SLS (Table 6).

– Given the very plausible exogeneity of prehistoric migratory patterns with respect to unobservables, I use as excluded instrument:

Migratory-Distance.— Migratory distance from Addis Ababa in thousands of kilometers (Ashraf and Galor, 2013).

– 2SLS and OLS results are almost identical and I cannot reject that diversity is exogenous at a level lower than 5% when controlling for all observables.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Predation-based Measures of Property Rights.

– Private-Property: 1 to 5 discrete score gaging stronger protection of private property in 1997. Available at http://www.heritage.org/Index/

– Av-Expropriation: Inverse measure of the risk of expropriation of private foreign investment from 0 to 10 with higher scores meaning less risk, averaged between 1985 and 1995. Available at http://www.prsgroup.com

– Table 8: Private-taking-based measures correlate weakly and possibly negatively with predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Predation-based Measures of Property Rights.

– Private-Property: 1 to 5 discrete score gaging stronger protection of private property in 1997. Available at http://www.heritage.org/Index/

– Av-Expropriation: Inverse measure of the risk of expropriation of private foreign investment from 0 to 10 with higher scores meaning less risk, averaged between 1985 and 1995. Available at http://www.prsgroup.com

– Table 8: Private-taking-based measures correlate weakly and possibly negatively with predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

The Data.

Predation-based Measures of Property Rights.

– Private-Property: 1 to 5 discrete score gaging stronger protection of private property in 1997. Available at http://www.heritage.org/Index/

– Av-Expropriation: Inverse measure of the risk of expropriation of private foreign investment from 0 to 10 with higher scores meaning less risk, averaged between 1985 and 1995. Available at http://www.prsgroup.com

– Table 8: Private-taking-based measures correlate weakly and possibly negatively with predation-based proxies for property rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Future Research.

Directions for Future Research.

– Property rights, transaction costs, and the boundaries of the firm.

– Horizontal property rights, vertical property rights, and the economy.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Future Research.

Directions for Future Research.

– Property rights, transaction costs, and the boundaries of the firm.

– Horizontal property rights, vertical property rights, and the economy.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 1.

Generic Property Rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 1.

Intellectual Property Rights.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 1.

Shareholders Protection.

Return 1

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Interpretation: Trade and . . .

– An intermediary (unauthorized agent) sells to a buyer in good-faith a good stolen (embezzled) from an original owner (the principal) at a low price. More generally when the potential buyer directly steals x, only with probability γ the legal system forces her to hand it back.

– An infringer expropriates the creator of an intellectual property and 1− γ is the chance of either exhaustion of the related rights or compulsory licensing of the idea/know-how (Ghosh, 2014; Bond and Saggi, 2017).

– A majority stockholder who “tunnels” creditors/minority shareholders’ resources out of a firm through the management (Johnson et al., 2000).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Interpretation: Trade and . . .

– An intermediary (unauthorized agent) sells to a buyer in good-faith a good stolen (embezzled) from an original owner (the principal) at a low price. More generally when the potential buyer directly steals x, only with probability γ the legal system forces her to hand it back.

– An infringer expropriates the creator of an intellectual property and 1− γ is the chance of either exhaustion of the related rights or compulsory licensing of the idea/know-how (Ghosh, 2014; Bond and Saggi, 2017).

– A majority stockholder who “tunnels” creditors/minority shareholders’ resources out of a firm through the management (Johnson et al., 2000).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Interpretation: Trade and . . .

– An intermediary (unauthorized agent) sells to a buyer in good-faith a good stolen (embezzled) from an original owner (the principal) at a low price. More generally when the potential buyer directly steals x, only with probability γ the legal system forces her to hand it back.

– An infringer expropriates the creator of an intellectual property and 1− γ is the chance of either exhaustion of the related rights or compulsory licensing of the idea/know-how (Ghosh, 2014; Bond and Saggi, 2017).

– A majority stockholder who “tunnels” creditors/minority shareholders’ resources out of a firm through the management (Johnson et al., 2000).

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Innovation.

– x is a squatted piece of land or a building (Brueckner and Selod, 2009).

– x is an input producing a fixed value when transformed via the “old” technology in the hands of the original owners and an uncertain one when the “new” technology is applied by the potential buyers.

– A principal hiring an agent in a segmented labor, financial or housing market (Piazzesi, Schneider, and Stroebel, 2017).

– x has a fixed value if used by the original owner and an uncertain one if employed by the party to which the state transfers it.

Return 2

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Innovation.

– x is a squatted piece of land or a building (Brueckner and Selod, 2009).

– x is an input producing a fixed value when transformed via the “old” technology in the hands of the original owners and an uncertain one when the “new” technology is applied by the potential buyers.

– A principal hiring an agent in a segmented labor, financial or housing market (Piazzesi, Schneider, and Stroebel, 2017).

– x has a fixed value if used by the original owner and an uncertain one if employed by the party to which the state transfers it.

Return 2

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Innovation.

– x is a squatted piece of land or a building (Brueckner and Selod, 2009).

– x is an input producing a fixed value when transformed via the “old” technology in the hands of the original owners and an uncertain one when the “new” technology is applied by the potential buyers.

– A principal hiring an agent in a segmented labor, financial or housing market (Piazzesi, Schneider, and Stroebel, 2017).

– x has a fixed value if used by the original owner and an uncertain one if employed by the party to which the state transfers it.

Return 2

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 2.

Innovation.

– x is a squatted piece of land or a building (Brueckner and Selod, 2009).

– x is an input producing a fixed value when transformed via the “old” technology in the hands of the original owners and an uncertain one when the “new” technology is applied by the potential buyers.

– A principal hiring an agent in a segmented labor, financial or housing market (Piazzesi, Schneider, and Stroebel, 2017).

– x has a fixed value if used by the original owner and an uncertain one if employed by the party to which the state transfers it.

Return 2

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 3.

Equilibrium: Intuition.

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 3.

Property Rights and Exogenous Transaction Costs.

Return 3

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 4.

Log-concave (Any) f If Exogenous (Endogenous) α.

– Exogenous transaction costs: Society’s objective function∫ λ λ̂

(λ− α) dF (λ) + ∫ λ̂ λ

[(1− γ)λ+ γv] dF (λ) for λ̂ < λ is sub-modular

in γ and α when f ′(λ̂) f(λ̂)

< αv(v+α) γ∗

1−γ∗ or v sufficiently large being f ′

f

decreasing and f unimodal (Dharmadhikari and Kumar, 1988).

– Market power: dα ∗

dγ = λ̂ and γ ∗ jumps from 0 to 1 as α∗, which is either 0

or α = min {

v, λ− v }

, becomes sufficiently small.

– Lemon-type distortions: Only λm matters.

– Incomplete contracting costs: Society’s objective function strictly increases with γ < 1− α and weakly decreases otherwise.

Return 4

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 4.

Log-concave (Any) f If Exogenous (Endogenous) α.

– Exogenous transaction costs: Society’s objective function∫ λ λ̂

(λ− α) dF (λ) + ∫ λ̂ λ

[(1− γ)λ+ γv] dF (λ) for λ̂ < λ is sub-modular

in γ and α when f ′(λ̂) f(λ̂)

< αv(v+α) γ∗

1−γ∗ or v sufficiently large being f ′

f

decreasing and f unimodal (Dharmadhikari and Kumar, 1988).

– Market power: dα ∗

dγ = λ̂ and γ ∗ jumps from 0 to 1 as α∗, which is either 0

or α = min {

v, λ− v }

, becomes sufficiently small.

– Lemon-type distortions: Only λm matters.

– Incomplete contracting costs: Society’s objective function strictly increases with γ < 1− α and weakly decreases otherwise.

Return 4

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 4.

Log-concave (Any) f If Exogenous (Endogenous) α.

– Exogenous transaction costs: Society’s objective function∫ λ λ̂

(λ− α) dF (λ) + ∫ λ̂ λ

[(1− γ)λ+ γv] dF (λ) for λ̂ < λ is sub-modular

in γ and α when f ′(λ̂) f(λ̂)

< αv(v+α) γ∗

1−γ∗ or v sufficiently large being f ′

f

decreasing and f unimodal (Dharmadhikari and Kumar, 1988).

– Market power: dα ∗

dγ = λ̂ and γ ∗ jumps from 0 to 1 as α∗, which is either 0

or α = min {

v, λ− v }

, becomes sufficiently small.

– Lemon-type distortions: Only λm matters.

– Incomplete contracting costs: Society’s objective function strictly increases with γ < 1− α and weakly decreases otherwise.

Return 4

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 4.

Log-concave (Any) f If Exogenous (Endogenous) α.

– Exogenous transaction costs: Society’s objective function∫ λ λ̂

(λ− α) dF (λ) + ∫ λ̂ λ

[(1− γ)λ+ γv] dF (λ) for λ̂ < λ is sub-modular

in γ and α when f ′(λ̂) f(λ̂)

< αv(v+α) γ∗

1−γ∗ or v sufficiently large being f ′

f

decreasing and f unimodal (Dharmadhikari and Kumar, 1988).

– Market power: dα ∗

dγ = λ̂ and γ ∗ jumps from 0 to 1 as α∗, which is either 0

or α = min {

v, λ− v }

, becomes sufficiently small.

– Lemon-type distortions: Only λm matters.

– Incomplete contracting costs: Society’s objective function strictly increases with γ < 1− α and weakly decreases otherwise.

Return 4

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 4.

Log-concave (Any) f If Exogenous (Endogenous) α.

– Exogenous transaction costs: Society’s objective function∫ λ λ̂

(λ− α) dF (λ) + ∫ λ̂ λ

[(1− γ)λ+ γv] dF (λ) for λ̂ < λ is sub-modular

in γ and α when f ′(λ̂) f(λ̂)

< αv(v+α) γ∗

1−γ∗ or v sufficiently large being f ′

f

decreasing and f unimodal (Dharmadhikari and Kumar, 1988).

– Market power: dα ∗

dγ = λ̂ and γ ∗ jumps from 0 to 1 as α∗, which is either 0

or α = min {

v, λ− v }

, becomes sufficiently small.

– Lemon-type distortions: Only λm matters.

– Incomplete contracting costs: Society’s objective function strictly increases with γ < 1− α and weakly decreases otherwise.

Return 4

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 5.

Robustness to Alternative Assumptions (Guerriero, 2016).

– Heterogeneous original owners and homogeneous potential buyers→ as in the basic setup, but the roles of traders are inverted.

– Potential buyers can make a take-or-leave-it offer pP < v to their match and thus always consume. pP = γv if λ ≥ λ̂P ≡ v + αγ and they expropriate otherwise→ for λ̂P < λ, society objective function is convex, and γ∗ is 0 ( α λ−v ) instead of 1 for v < λm (v ≥ λm) and α

∗ sufficiently small.

– Expropriation entails a c > min {(1− γ)λ, α} → For λ̂C < λ (otherwise), the social welfare function increases with γ (is convex) and γ∗

equals 1 (falls from 1 to 0 whenever α becomes sufficiently small).

Return 5

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 5.

Robustness to Alternative Assumptions (Guerriero, 2016).

– Heterogeneous original owners and homogeneous potential buyers→ as in the basic setup, but the roles of traders are inverted.

– Potential buyers can make a take-or-leave-it offer pP < v to their match and thus always consume. pP = γv if λ ≥ λ̂P ≡ v + αγ and they expropriate otherwise→ for λ̂P < λ, society objective function is convex, and γ∗ is 0 ( α λ−v ) instead of 1 for v < λm (v ≥ λm) and α

∗ sufficiently small.

– Expropriation entails a c > min {(1− γ)λ, α} → For λ̂C < λ (otherwise), the social welfare function increases with γ (is convex) and γ∗

equals 1 (falls from 1 to 0 whenever α becomes sufficiently small).

Return 5

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 5.

Robustness to Alternative Assumptions (Guerriero, 2016).

– Heterogeneous original owners and homogeneous potential buyers→ as in the basic setup, but the roles of traders are inverted.

– Potential buyers can make a take-or-leave-it offer pP < v to their match and thus always consume. pP = γv if λ ≥ λ̂P ≡ v + αγ and they expropriate otherwise→ for λ̂P < λ, society objective function is convex, and γ∗ is 0 ( α λ−v ) instead of 1 for v < λm (v ≥ λm) and α

∗ sufficiently small.

– Expropriation entails a c > min {(1− γ)λ, α} → For λ̂C < λ (otherwise), the social welfare function increases with γ (is convex) and γ∗

equals 1 (falls from 1 to 0 whenever α becomes sufficiently small).

Return 5

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 5.

Robustness to Alternative Assumptions (Guerriero, 2016).

– Heterogeneous original owners and homogeneous potential buyers→ as in the basic setup, but the roles of traders are inverted.

– Potential buyers can make a take-or-leave-it offer pP < v to their match and thus always consume. pP = γv if λ ≥ λ̂P ≡ v + αγ and they expropriate otherwise→ for λ̂P < λ, society objective function is convex, and γ∗ is 0 ( α λ−v ) instead of 1 for v < λm (v ≥ λm) and α

∗ sufficiently small.

– Expropriation entails a c > min {(1− γ)λ, α} → For λ̂C < λ (otherwise), the social welfare function increases with γ (is convex) and γ∗

equals 1 (falls from 1 to 0 whenever α becomes sufficiently small).

Return 5

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 6.

The Political Economy of Property Rights Protection.

This time, a group of “insiders” chooses γ∗:

– Exogenous transaction costs: whether the excluded potential buyers have valuation lower (higher) than λ+ � (λ− �), γ∗ still falls with α for � not too large and is set too high by individuals not facing uncertainty, e.g., Zamindari system of land taxation (Besley and Ghatak, 2010).

– Market power: α∗ remains the same and γ∗ is the same (too high and falls with α∗ for � small) when instead high(low)-valuation potential buyers are kept out. A similar analysis holds true in the case of transaction costs endogenously determined by lemons-type distortions.

– Incomplete contracting: excluding either of the two groups of firms from the institutional design does not affect the equilibrium.

Return 6

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 6.

The Political Economy of Property Rights Protection.

This time, a group of “insiders” chooses γ∗:

– Exogenous transaction costs: whether the excluded potential buyers have valuation lower (higher) than λ+ � (λ− �), γ∗ still falls with α for � not too large and is set too high by individuals not facing uncertainty, e.g., Zamindari system of land taxation (Besley and Ghatak, 2010).

– Market power: α∗ remains the same and γ∗ is the same (too high and falls with α∗ for � small) when instead high(low)-valuation potential buyers are kept out. A similar analysis holds true in the case of transaction costs endogenously determined by lemons-type distortions.

– Incomplete contracting: excluding either of the two groups of firms from the institutional design does not affect the equilibrium.

Return 6

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 6.

The Political Economy of Property Rights Protection.

This time, a group of “insiders” chooses γ∗:

– Exogenous transaction costs: whether the excluded potential buyers have valuation lower (higher) than λ+ � (λ− �), γ∗ still falls with α for � not too large and is set too high by individuals not facing uncertainty, e.g., Zamindari system of land taxation (Besley and Ghatak, 2010).

– Market power: α∗ remains the same and γ∗ is the same (too high and falls with α∗ for � small) when instead high(low)-valuation potential buyers are kept out. A similar analysis holds true in the case of transaction costs endogenously determined by lemons-type distortions.

– Incomplete contracting: excluding either of the two groups of firms from the institutional design does not affect the equilibrium.

Return 6

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 6.

The Political Economy of Property Rights Protection.

This time, a group of “insiders” chooses γ∗:

– Exogenous transaction costs: whether the excluded potential buyers have valuation lower (higher) than λ+ � (λ− �), γ∗ still falls with α for � not too large and is set too high by individuals not facing uncertainty, e.g., Zamindari system of land taxation (Besley and Ghatak, 2010).

– Market power: α∗ remains the same and γ∗ is the same (too high and falls with α∗ for � small) when instead high(low)-valuation potential buyers are kept out. A similar analysis holds true in the case of transaction costs endogenously determined by lemons-type distortions.

– Incomplete contracting: excluding either of the two groups of firms from the institutional design does not affect the equilibrium.

Return 6

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 7.

Production.

Differently from Jordan (2006), Piccione and Rubinstein (2007), Bar-Gill and Persico (2016), Segal and Whinston (2016), AZG (2017), incomplete property rights can be optimal even if original owners decide between t1 and t2 whether produce x at the cost κ < v. Since their utility rises with γ∗,

→ there is a γ̃ such that x is produced only if γ∗ ≥ γ̃, and being production valuable also for the potential buyers, society always selects the maximum γ̂ between γ̃ and γ∗ for κ not too large.

When transaction costs are endogenous, γ̃ weakly decreases with α for λ sufficiently large and v not too small compared to α.

Return 7

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 7.

Production.

Differently from Jordan (2006), Piccione and Rubinstein (2007), Bar-Gill and Persico (2016), Segal and Whinston (2016), AZG (2017), incomplete property rights can be optimal even if original owners decide between t1 and t2 whether produce x at the cost κ < v. Since their utility rises with γ∗,

→ there is a γ̃ such that x is produced only if γ∗ ≥ γ̃, and being production valuable also for the potential buyers, society always selects the maximum γ̂ between γ̃ and γ∗ for κ not too large.

When transaction costs are endogenous, γ̃ weakly decreases with α for λ sufficiently large and v not too small compared to α.

Return 7

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 7.

Production.

Differently from Jordan (2006), Piccione and Rubinstein (2007), Bar-Gill and Persico (2016), Segal and Whinston (2016), AZG (2017), incomplete property rights can be optimal even if original owners decide between t1 and t2 whether produce x at the cost κ < v. Since their utility rises with γ∗,

→ there is a γ̃ such that x is produced only if γ∗ ≥ γ̃, and being production valuable also for the potential buyers, society always selects the maximum γ̂ between γ̃ and γ∗ for κ not too large.

When transaction costs are endogenous, γ̃ weakly decreases with α for λ sufficiently large and v not too small compared to α.

Return 7

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 8.

Investment.

At the fixed cost ζ < v, original owners can decide between t1 and t2 whether to turn v and λ into respectively v (1 + ρ) and λ (1 + ρ) with ρ > 0:

– Exogenous transaction costs: investment goes through only if γ > γ̃I . For γ∗I > γ̃I , society picks γ

∗ I > γ

∗ instead of γ∗ if she is better off with investment. For γ∗I ≤ γ̃I , γ̃I might be preferred to γ∗. Investment goes through for α small compared to v and ρ (ζ) not too small (large). For v ≥ λm, then γ∗ = 1 and investment materializes.

– Market power: α∗I = α ∗ (1 + ρ) implies γ∗I = γ

∗, and the equilibrium is as in the exogenous transaction costs case.

– Lemon-type distortions: α < 21+ρ , high-λ buyers buy for γ ∗ ≥ 2θ(1+ρ) ,

and the equilibrium is as in the exogenous transaction costs case.

Return 8

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 8.

Investment.

At the fixed cost ζ < v, original owners can decide between t1 and t2 whether to turn v and λ into respectively v (1 + ρ) and λ (1 + ρ) with ρ > 0:

– Exogenous transaction costs: investment goes through only if γ > γ̃I . For γ∗I > γ̃I , society picks γ

∗ I > γ

∗ instead of γ∗ if she is better off with investment. For γ∗I ≤ γ̃I , γ̃I might be preferred to γ∗. Investment goes through for α small compared to v and ρ (ζ) not too small (large). For v ≥ λm, then γ∗ = 1 and investment materializes.

– Market power: α∗I = α ∗ (1 + ρ) implies γ∗I = γ

∗, and the equilibrium is as in the exogenous transaction costs case.

– Lemon-type distortions: α < 21+ρ , high-λ buyers buy for γ ∗ ≥ 2θ(1+ρ) ,

and the equilibrium is as in the exogenous transaction costs case.

Return 8

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 8.

Investment.

At the fixed cost ζ < v, original owners can decide between t1 and t2 whether to turn v and λ into respectively v (1 + ρ) and λ (1 + ρ) with ρ > 0:

– Exogenous transaction costs: investment goes through only if γ > γ̃I . For γ∗I > γ̃I , society picks γ

∗ I > γ

∗ instead of γ∗ if she is better off with investment. For γ∗I ≤ γ̃I , γ̃I might be preferred to γ∗. Investment goes through for α small compared to v and ρ (ζ) not too small (large). For v ≥ λm, then γ∗ = 1 and investment materializes.

– Market power: α∗I = α ∗ (1 + ρ) implies γ∗I = γ

∗, and the equilibrium is as in the exogenous transaction costs case.

– Lemon-type distortions: α < 21+ρ , high-λ buyers buy for γ ∗ ≥ 2θ(1+ρ) ,

and the equilibrium is as in the exogenous transaction costs case.

Return 8

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 8.

Investment.

At the fixed cost ζ < v, original owners can decide between t1 and t2 whether to turn v and λ into respectively v (1 + ρ) and λ (1 + ρ) with ρ > 0:

– Exogenous transaction costs: investment goes through only if γ > γ̃I . For γ∗I > γ̃I , society picks γ

∗ I > γ

∗ instead of γ∗ if she is better off with investment. For γ∗I ≤ γ̃I , γ̃I might be preferred to γ∗. Investment goes through for α small compared to v and ρ (ζ) not too small (large). For v ≥ λm, then γ∗ = 1 and investment materializes.

– Market power: α∗I = α ∗ (1 + ρ) implies γ∗I = γ

∗, and the equilibrium is as in the exogenous transaction costs case.

– Lemon-type distortions: α < 21+ρ , high-λ buyers buy for γ ∗ ≥ 2θ(1+ρ) ,

and the equilibrium is as in the exogenous transaction costs case.

Return 8

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 8.

Investment.

At the fixed cost ζ < v, original owners can decide between t1 and t2 whether to turn v and λ into respectively v (1 + ρ) and λ (1 + ρ) with ρ > 0:

– Exogenous transaction costs: investment goes through only if γ > γ̃I . For γ∗I > γ̃I , society picks γ

∗ I > γ

∗ instead of γ∗ if she is better off with investment. For γ∗I ≤ γ̃I , γ̃I might be preferred to γ∗. Investment goes through for α small compared to v and ρ (ζ) not too small (large). For v ≥ λm, then γ∗ = 1 and investment materializes.

– Market power: α∗I = α ∗ (1 + ρ) implies γ∗I = γ

∗, and the equilibrium is as in the exogenous transaction costs case.

– Lemon-type distortions: α < 21+ρ , high-λ buyers buy for γ ∗ ≥ 2θ(1+ρ) ,

and the equilibrium is as in the exogenous transaction costs case.

Return 8

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 9.

USOABU (Altonji et al., 2005).

Focus on an index gauging how much stronger selection on unobservables, relative to selection on observables, must be to explain away the full estimated effect, i.e., absolute value of λF/(λR − λF), where λF (λR) is the coefficient obtained from a regression with a full (restricted) set of controls.

Intuition:

(λR − λF) small→ selection on observables has little effect.

λF large→ effect that selection on unobservables must explain is big.

Return 9

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 9.

USOABU (Altonji et al., 2005).

Focus on an index gauging how much stronger selection on unobservables, relative to selection on observables, must be to explain away the full estimated effect, i.e., absolute value of λF/(λR − λF), where λF (λR) is the coefficient obtained from a regression with a full (restricted) set of controls.

Intuition:

(λR − λF) small→ selection on observables has little effect.

λF large→ effect that selection on unobservables must explain is big.

Return 9

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 9.

USOABU (Altonji et al., 2005).

Focus on an index gauging how much stronger selection on unobservables, relative to selection on observables, must be to explain away the full estimated effect, i.e., absolute value of λF/(λR − λF), where λF (λR) is the coefficient obtained from a regression with a full (restricted) set of controls.

Intuition:

(λR − λF) small→ selection on observables has little effect.

λF large→ effect that selection on unobservables must explain is big.

Return 9

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 10.

Basic Intuition: Solution . . .

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 10.

and Comparative Statics.

Return 10

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 11.

Heterogeneity Rises as in the Basic Model.

∆/2 potential buyers value the good at λ > 0, ∆/2 of them value x at λ > v > λ, and the remainder has a λ ∈

[ λ, λ

] distributed according to the

pdf f with cumulative distribution function F. For a rise in ∆ to be a mean-preserving spread, E (λ) = λm. γ∗ maximizes

(1−γ)λ+γv 2 ∆+

(1−∆) ∫ λ λ̂

(λ− α) dF (λ) + (1−∆) ∫ λ̂ λ

[(1− γ)λ+ γv] dF (λ),

for λ̂ < λ and (1− γ)λm + γv o/w. dλ̂dγ∗ [

1−γ∗ γ∗ vλ̂f

′ ( λ̂ )

+ v−αγ∗ f ( λ̂ )]

< 0 assures strict concavity. An interior γ∗ is implicitly defined by

1−γ∗ γ∗ vλ̂f

( λ̂ ) − ( λ̂− v

) F ( λ̂ )

+ ∫ λ̂ λ

F (λ) dλ+ (v−λ)l∆1−∆ = 0.

If v ≥ (<)λm, then γ∗ = 1 (γ∗ weakly rises with ∆ for α and v small being the objective function super-modular in γ and ∆ by inspection).

Return 11

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 12.

Heterogeneous Original Owners.

Original owners have heterogeneous valuations v ∈ [v, v] with l ≡ v− v and potential buyers the fixed λ ∈ (v, v). The latter can buy at v + α. Those involved in v ≤ γλ− α ≡ v̂ < v matches buy, and the others expropriate.

Society maximizes (1− γ)λ+ γvm for v < v̂ and for v ≥ v̂ maximizes (1−γ)λ+γv

2 ∆ + (1−∆) ∫ v

v̂ (1−γ)λ+γv

l dv + (1−∆) ∫ v̂

v λ−α

l dv + (λ− α) ∆ 2 .

While γ∗ can jump from 0 to the positive solution, which in turn weakly rises with ∆, for ∆ sufficiently large and vm < λ, γ∗ = 1 for vm ≥ λ.

Return 12

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 12.

Heterogeneous Original Owners.

Original owners have heterogeneous valuations v ∈ [v, v] with l ≡ v− v and potential buyers the fixed λ ∈ (v, v). The latter can buy at v + α. Those involved in v ≤ γλ− α ≡ v̂ < v matches buy, and the others expropriate.

Society maximizes (1− γ)λ+ γvm for v < v̂ and for v ≥ v̂ maximizes (1−γ)λ+γv

2 ∆ + (1−∆) ∫ v

v̂ (1−γ)λ+γv

l dv + (1−∆) ∫ v̂

v λ−α

l dv + (λ− α) ∆ 2 .

While γ∗ can jump from 0 to the positive solution, which in turn weakly rises with ∆, for ∆ sufficiently large and vm < λ, γ∗ = 1 for vm ≥ λ.

Return 12

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 12.

Heterogeneous Original Owners.

Original owners have heterogeneous valuations v ∈ [v, v] with l ≡ v− v and potential buyers the fixed λ ∈ (v, v). The latter can buy at v + α. Those involved in v ≤ γλ− α ≡ v̂ < v matches buy, and the others expropriate.

Society maximizes (1− γ)λ+ γvm for v < v̂ and for v ≥ v̂ maximizes (1−γ)λ+γv

2 ∆ + (1−∆) ∫ v

v̂ (1−γ)λ+γv

l dv + (1−∆) ∫ v̂

v λ−α

l dv + (λ− α) ∆ 2 .

While γ∗ can jump from 0 to the positive solution, which in turn weakly rises with ∆, for ∆ sufficiently large and vm < λ, γ∗ = 1 for vm ≥ λ.

Return 12

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 12.

Heterogeneous Original Owners.

Original owners have heterogeneous valuations v ∈ [v, v] with l ≡ v− v and potential buyers the fixed λ ∈ (v, v). The latter can buy at v + α. Those involved in v ≤ γλ− α ≡ v̂ < v matches buy, and the others expropriate.

Society maximizes (1− γ)λ+ γvm for v < v̂ and for v ≥ v̂ maximizes (1−γ)λ+γv

2 ∆ + (1−∆) ∫ v

v̂ (1−γ)λ+γv

l dv + (1−∆) ∫ v̂

v λ−α

l dv + (λ− α) ∆ 2 .

While γ∗ can jump from 0 to the positive solution, which in turn weakly rises with ∆, for ∆ sufficiently large and vm < λ, γ∗ = 1 for vm ≥ λ.

Return 12

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 13.

Private Sales.

A potential buyer can make a take-or-leave offer pP < v to the original owner and consume always x if the offer is accepted. Thus, they make a pP = γv offer for λ ≥ λ̂P ≡ v + αγ and expropriate otherwise. Society maximizes

(λ−α)∆ 2 + (1−∆)

∫ λ λ̂P

λ−α l dλ+ (1−∆)

∫ λ̂P λ

(1−γ)λ+γv l dλ+

(1−γ)λ+γv 2 ∆

for λ̂P < λ, and WFE otherwise. For λ̂P < λ, society’s problem is strictly convex. Therefore, γ∗ is the either 1 or the corner solution 0 ( α

λ−v ) for v < λm (v ≥ λm) and the former is more likely the higher ∆ is.

Return 13

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 13.

Private Sales.

A potential buyer can make a take-or-leave offer pP < v to the original owner and consume always x if the offer is accepted. Thus, they make a pP = γv offer for λ ≥ λ̂P ≡ v + αγ and expropriate otherwise. Society maximizes

(λ−α)∆ 2 + (1−∆)

∫ λ λ̂P

λ−α l dλ+ (1−∆)

∫ λ̂P λ

(1−γ)λ+γv l dλ+

(1−γ)λ+γv 2 ∆

for λ̂P < λ, and WFE otherwise. For λ̂P < λ, society’s problem is strictly convex. Therefore, γ∗ is the either 1 or the corner solution 0 ( α

λ−v ) for v < λm (v ≥ λm) and the former is more likely the higher ∆ is.

Return 13

Class 2: The Law & Economics of Property Rights.

Key Ideas. G-2017: Theory; Evidence. G-2016: Theory; Evidence. Appendices.

Appendix 14.

Costly Expropriation.

Expropriation entails a c > min {(1− γ)λ, α} and γ∗ maximizes

(λ−α)∆ 2 + (1−∆)

∫ λ λ̂C

λ−α l dλ+

(1−∆) ∫ λ̂C

c 1−γ

(1−γ)λ+γv−c l dλ+

[ 1−∆

l

( c

1−γ − λ )

+ ∆2

] v,

((1−∆) ∫ λ

c 1−γ

(1−γ)λ+γv−c l dλ+

[ 1−∆

l c−λ(1−γ)

1−γ + ∆ 2

] v + [

(1−γ)λ+γv−c]∆ 2 ).

for λ̂C < λ (o/w). For λ̂C < λ, the social welfare function always increases with γ. For λ̂C ≥ λ instead, society’s problem is convex and therefore γ∗ is either 0 or 1 with the latter more likely the larger ∆ is for c not too small.

Return 14

Class 2: The Law & Economics of Property Rights.

  • Key Ideas.
    • Research Question.
  • G-2017:
    • Property Rights, Transaction Costs, and the Limits of the Market.
  • Theory;
    • Exogenous Transaction Costs.
    • Endogenous Transaction Costs.
    • Robustness to Alternative Assumptions.
  • Evidence.
    • Empirical Approach.
    • Future Research.
  • G-2016:
    • Endogenous Property Rights.
  • Theory;
    • Inefficient Expropriation Versus Inefficient Exclusion from Trade.
    • Endogenous Transaction Costs.
    • Robustness to Alternative Assumptions.
  • Evidence.
    • The Data.
    • Future Research.
  • Appendices.
    • Appendix 1.
    • Appendix 2.
    • Appendix 3.
    • Appendix 4.
    • Appendix 5.
    • Appendix 6.
    • Appendix 7.
    • Appendix 8.
    • Appendix 9.
    • Appendix 10.
    • Appendix 11.
    • Appendix 12.
    • Appendix 13.
    • Appendix 14.