Arrunada Seminar: Amnon Lehavi – Economics, Property Rights, and Third Parties

4 January 2013 at 4:17 am 2 comments

| Amnon Lehavi |

Economics, Property Rights, and Third Parties

Benito Arruñada’s book offers an innovative and intriguing analysis of the crucial role that institutions such as land registries play for securing property rights. A key observation that Benito makes deals with the different focus that economists have vis-à-vis lawyers in their view of property. While “everybody agrees that security of property is essential for development” (p. 24), Benito argues that economists tend to be more concerned with the public order function of property, one which guards against violence and confiscation and which then allows for parties to engage in subsequent efficient bilateral transactions, as modeled by Coase and others. But as Benito aptly notes, lawyers are also concerned with a different aspect of securing property rights, one which has to do with otherwise “routine” property dealings that may fall prey to misuse of transactions. Such conflicts can arise, for example, between a good faith purchaser of an asset and the original owner whose property has been deprived by an intermediate party and then “sold” on the market. Sticking to a contractual paradigm, one that is simply assumed by economists, may thus come short in identifying the true complexity of property rights.

To more fully protect against potential abuse of property rights, or against other cases undermining the security of title, the legal system should be able to award remedies to property owners to protect their interests not only vis-à-vis the direct party to the transaction but also vis-à-vis third parties (in rem protection). This is where land registries come into play. These institutions provide the mechanisms which ensure that private rights would be broadly enforced, “good against the world.” The publicity granted to property rights through such registries and the guarantee of good title, especially in those jurisdictions which follow the registration (Torrens) system, add a key feature of certainty to property rights, one that may be missing from standard economic analysis. Benito’s book offers a unique contribution in identifying the economic and legal foundations of such institutions. His work should be closely studied by scholars across all fields.

Amnon Lehavi
Atara Kaufman Professor of Real Estate, Radzyner School of Law
Academic Director, Gazit-Globe Real Estate Institute Interdisciplinary Center (IDC)

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

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2 Comments Add your own

  • 1. Peter St. Onge  |  6 January 2013 at 6:09 am

    Interesting because this is the type of property insecurity that is becoming more common in developed countries. Undermine property in the developed countries and that’s pretty much the whole ballgame.

  • 2. Benito Arruñada  |  19 January 2013 at 2:23 pm

    Thank you, Amnon. You rightly point out that, in studying property, economists have focused on its “public order” elements, disregarding its “private” elements—in particular, the private transaction costs of trading property, which are substantial even under a functional public order. In the book, I take precisely the opposite approach, assuming a functional public order and focusing the analysis on transaction costs.

    Given that I examine transaction costs in the areas of both, real property and corporations, your comment neatly complements Giorgio Zanarone’s comment. Playing a bit with the words, it could be said that, while chapter 3 argues for a “property” theory of the firm, chapter 2 could be seen as a “corporate” theory of property. Contracting poses, in essence, structurally similar difficulties in both property and corporations.

    A final conjecture, related to Peter St. Onge’s comment. In the last decades, plenty of efforts have been dedicated to strengthen the institutional support of property in developing countries. I have the impression that many states have successfully improved their “public order” framework: they now safeguard private property better. With respect to private transaction costs, they have also spent huge resources in land titling and business formalization, but often with poor results. Meanwhile, developed countries have mainly taken their titling and formalization institutions for granted and, at most, “simplified” their procedures, often without really understanding the costs and consequences. I suspect that policy mishaps in both types of countries share a common intellectual root in the “contractual” emphasis of economic analysis, which has been discussed in other posts in this seminar.

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