Arrunada Seminar: John Nye – Formalization and “Optimal” Regulation

3 January 2013 at 11:33 am 2 comments

| John Nye |

Formalization and “Optimal” Regulation

Benito’s work on titling and formalization seems to serve as an excellent illustration of the problem of “optimal” regulation.  Much of the debate about state vs. market presupposes a clear-cut distinction between private and public spheres.  But as Benito’s complex discussion of the evolution of formalization and the choices involved in selecting appropriate titling or registration systems shows, the creation of good institutions that protect and enhance property often involve conflicts between different levels of regulatory power (local vs. national) and conflicts between well-functioning but non-scaleable local norms and more cumbersome but universally applicable formal rules.  What are the advantages of systems that allow at least some functioning property arrangements in developing societies but which constrain the creation of more effective systems as the nation grows?  Do central systems that work closer to the ideal and minimize transactions cost presuppose too much of the state capacity that is often lacking in many nations?  Does a well-functioning central system of registration enhance state capacity with greater use or does it encourage unwanted Leviathan by transferring too much power to the State? Consider a country like the People’s Republic of China that did not even have formal private property till a few years ago: Should the state be using its period of authoritarian powers to impose new and theoretically “sensible” rules that might be easier to propose now than later or should it tread lightly and experiment with varieties of local arrangements in the hope of finding which sets of rules work best in a Chinese context, while running the risk that such arrangements may congeal with success and become difficult to reverse?

I’m sure the specific issues of titling, registration, and formalization that Benito discusses will be well treated by those with more specific expertise in these areas.  But I also hope we will see some commentary on these broader issues of evolutionary problems in the construction of liberal states.

John V.C. Nye
George Mason University and Higher School of Economics, Moscow

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

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2 Comments Add your own

  • 1. Benito Arruñada (@BenitoArrunada)  |  18 January 2013 at 4:15 am

    Thank you, John. I agree that the study of registries shows that there is plenty of confusion with respect to the distinction between private and public spheres. Let me mention a concrete example: it is often thought that land registration of the German or Torrens (i.e., Australian) type is more “interventionist” than land recordation (the system in the USA and France). However, for a given level of legal certainty, this is not the case: to reach the degree of security provided by the German register, in the USA you need at least a judicial decision, it is not enough with filing your property deed in your county recording office. This, by itself, does not mean that the German system is more efficient or in any way superior. It means that, when comparing institutions, we should be more careful about the “ceteris paribus” condition.

    I suspect that this type of error often comes about because we have lost track of which are the necessary institutions of a (classical) liberal state. In the closing section of the book, I conclude, along these lines, that behind weaknesses often observed in public registries (including, in the USA, from appalling record offices to the MERS fiasco or the patent crisis), “lies a misunderstanding about the role of registries in the economy and the proper role of the state in providing services for the registration of private contracts. For markets to function, it is often thought that a minimal state is good. This confuses the liberal-state institutions supporting markets with the welfare-state institutions replacing markets. Registries are conceived as unnecessary barriers instead of as facilitators of transactions. Such disregard for registries’ value and their organizational complexity leads to policies that, by minimizing public registries, give way to the overgrowth of industries providing ineffective palliative services, such as those of lawyers, notaries, title insurers, or financial dealers”.

  • 2. Benito Arruñada  |  18 January 2013 at 4:33 am

    I know little about China but we have a closer example in the USA: local heterogeneity in county recordation offices and property law seems to have made necessary since World War II for title insurance policies to be added to mortgage loans before they could be sold in the secondary mortgage market. More recently, also in the secondary mortgage market, private electronic mortgage registration of mortgage assignments (through MERS, the outfit at the core of the mortgage foreclosure crisis) was created by lenders partly as a response to the weaknesses and diversity of the local recording offices.

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