Arrunada Seminar: P.J. Hill – The Importance of Sequential Exchange

3 January 2013 at 11:22 am 2 comments

| P. J. Hill |

The Importance of Sequential Exchange

Arruñada’s important contribution to the vast literature on institutions and exchange comes from a concept that has been largely ignored by previous contributors (including me), namely the sequential nature of exchange. Most of us have treated the definition and enforcement of property rights as important for exchange, but we have not thought seriously about the ongoing nature of such exchange. If specialization and impersonal exchange are going to occur, the transfer of a property right will be repeated numerous times. Arruñada has integrated well the sequential nature of exchange into his analysis. That integration leads to a host of insights about informality, property registers, and the trade-offs that come from lowering the transaction costs of exchange versus the strength of property rights. How did so many of us miss such an important concept in our work on property rights and the exchange of those rights?

P.J. Hill
Professor Emeritus, Wheaton College and Senior Fellow, Property and Environment Research Center (PERC)

Entry filed under: - Lien -, Institutions, Law and Economics, New Institutional Economics, Theory of the Firm. Tags: .

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2 Comments Add your own

  • 1. Peter Klein  |  3 January 2013 at 12:34 pm

    PJ, thanks for putting it this way (and for participating in the seminar more generally). Could this just reflect a subtle methodological bias — i.e., while institutional analysis takes seriously ideas about process, learning, path dependence (Menger, Hayek, North, and Williamson too), much of the early work on property rights in the UCLA/Chicago tradition tended to frame problems in equilibrium, comparative-static terms. Naturally, sequence becomes less important than the efficiency and other properties of the final outcome. Or am I oversimplifying?

  • 2. Benito Arruñada (@BenitoArrunada)  |  15 January 2013 at 2:37 pm

    Thanks a lot, P.J., for your nice words and frankness. I think a lesson here, and this may provide an alternative answer to Peter’s question, is that the economics of property rights has simply focused on a set of problems for which the interrelated concepts of sequential exchange and in rem property rights seem unnecessary. Instead, it has been worried by problems such as the role of government in protecting and impeding property and the tragedy of the commons. Therefore, it has paid a lot of attention to public law but little attention to private property law.

    However, if we want to understand the structure of transaction costs in property exchange and to illuminate the design of its supporting institutions, we should focus our attention on the problems and solutions typical of property law. This is most evident in the fact that the main concept in property law, the key distinction between “contract” rights (i.e., in personam rights valid only between the contracting parties) and “property” rights (i.e., in rem rights valid against everybody) has paid almost no role in economic analyses. These analyses therefore have overlooked the main technique in the enforcement of rights—their enforcement in rem—; the associated conflict between strong (i.e., in rem) enforcement and transaction costs in subsequent exchange; and the institutions, such as good-faith-purchaser legal rules and land registries, that aim to overcome such conflict and make impersonal exchange viable.

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