Private Property Rights
Private property rights are the rights of individuals and firms to own, use, and dispose of assets, and to exclude others from using them. Private property rights are a central institution of a market economy, and their definition and enforcement affect economic performance.
Concept
Property rights comprise several elements, including the right to use the asset, the right to exclude others, and the right to transfer the asset to others. The rights may be held by individuals, by firms, or by other entities.
The definition of property rights determines who has the authority to use the asset and to benefit from it. The enforcement determines whether the rights are respected. Both the definition and the enforcement affect the incentives of the owners.
Role in the Economy
Property rights affect the incentives to invest and to use resources efficiently. A secure owner has an incentive to invest in the asset, since the owner can capture the returns. An insecure owner has less incentive, since the returns may be taken by others.
Property rights also facilitate exchange. A well-defined right can be transferred, which allows the asset to move to the use in which it is most valued. The transfer requires that the rights be well defined and that the transaction costs be low.
Property rights are central to the analysis of the firm and of the financial system. The rights to the assets of a firm determine the claims of the creditors and the shareholders, and the ability to pledge assets as collateral depends on the definition and the enforcement of the rights.
Institutions
The definition and the enforcement of property rights require institutions, including the legal system, the courts, and the police. The quality of these institutions affects the security of the rights and the willingness of individuals and firms to invest.
The institutions also include the mechanisms for the registration of the ownership of assets, including land registries and registers of shares and of other securities. The registration provides information about the ownership and facilitates the transfer of the assets.
The development of these institutions is a central element of the development process. The absence of secure property rights and of effective institutions is a major constraint on investment and growth in developing countries.
Debate
The analysis of property rights is connected to the debate about the role of the state and of the market. Some argue that the definition and the enforcement of property rights is the fundamental function of the state, while others argue that the state itself may threaten the rights.
The debate also concerns the balance between private and public ownership. The choice depends on the characteristics of the assets and on the objectives of the policy. The design of the arrangements must take account of the incentives and of the institutions.
The Economics of Property Rights
The analysis of the property rights is central to the new institutional economics, which holds that the institutions, including the property rights, determine the performance of the economy.
The framework analyses the effect of the property rights on the incentives to invest and to use the resources efficiently. The secure rights encourage the investment, while the insecure rights discourage it.
The framework also analyses the effect of the property rights on the transaction costs. The well-defined rights reduce the cost of the exchange, since the parties can transfer the rights without the need for the complex agreements.
The Tragedy of the Commons
The tragedy of the commons describes the depletion of the resources that are held in common, since the individuals have the incentive to use the resources without bearing the full cost.
The analysis holds that the common ownership leads to the overuse of the resources, and that the private ownership or the regulation can address the problem. The analysis has been applied to the fisheries, to the grazing land, and to the other resources.
The analysis has been refined by the work of Elinor Ostrom, who showed that the communities can develop the institutions to manage the common resources sustainably. The findings inform the design of the policy for the management of the resources.
The Reform of the Property Rights
The reform of the property rights is a central element of the transition of the economies and of the development process. The reform involves the definition of the rights, the establishment of the institutions for their enforcement, and the transfer of the rights to the private sector.
The experience of the transition economies shows the difficulty of the reform. The reform requires the institutions, including the legal system and the financial system, and the absence of the institutions can lead to the concentration of the ownership and to the weak performance.
The design of the reform must take account of the context and must build the institutions that are required for the effective operation of the property rights.
Summary
Private property rights are a central institution of the market economy, and their definition and enforcement affect the incentives to invest and to use the resources efficiently. The analysis of the rights, of the tragedy of the commons, and of the reform informs the understanding of the role of the institutions.