Title: Are both dimensions of property rights “efficient”?
Abstract: AbstractThe institutions on property rights claims that property rights emerged and are enforced when their enforcement maximizes net wealth. In a cross-country pattern this is usually understood as the prediction that development creates the incentives to provide higher quality property rights, but this claim is highly debated. This paper tries to take various property rights scholars' arguments seriously and see property rights quality as a two dimensional concept, the two dimensions being the definition and the assignment of property rights. The paper derives a measure for these two dimensions of property rights and shows that it is the assignment dimension which is determined by development, while the definition dimensions is rather determined by cultural factors, especially those deeper factors that seem to reflect a long-run effect of Western European culture. According to the paper, the main reasons behind this may be the difference in the expropriability of income generated by an improvement of each dimension, and the way such improvements may or may not affect countries' catching up process.JEL: P14, P16, O11Keywords: property rights, efficient institutions, development, culture(ProQuest: ... denotes formulae omitted.)1. IntroductionOnce it is accepted that property rights security is the most important determinant of development, it is obvious we need to immediately raise the question, what are the most important determinants of property rights security? In this paper I will focus on one of the explanations which have been developed to answer that question, the so-called approach to property rights, or the efficient institutions view. The efficient institutions hypothesis is understood as the claim that development will create incentives for governments to provide a higher security of property rights. The empirical tests of this hypothesis are usually cross-country regressions with property rights security on the left-hand side and a measure of development on the right-hand side.The paper argues that, on the one hand, property rights quality is a two-dimensional concept, because property rights should be considered as the result of two constitutional decisions: one is concerned with the definition of property rights while the other is concerned with the assignment of property rights. Definition and assignment will be considered as two dimensions of property rights quality. On the other hand, property rights in the approach must be understood in a broader sense than it usually is by the empirical papers. It must also include those rights that are considered to be in the political sphere of human actions as opposed to the economic.The economic approach, when carefully applied, does not imply that the one single determinant of property rights is development. As this view suggests that institutions are created to minimize transaction costs, culture as an important determinant of transaction costs should be considered, too. The two dimensions of property rights, however, might not equally well be determined by development and culture. We can expect that development has a greater effect on the assignment dimension while culture has a greater effect on the definition dimension. First, even if the assignment dimension is improved by development, the definition dimension can only be improved if development is based on innovation. When imitation is the main driving force, the government will not have an incentive to widen the definition of property rights beyond the level of what is needed for the markets for goods in order to reach the level which would be needed for a market for ideas. Second, the less the definition of property rights is in line with cultural understanding, the more costly it will be to enforce them.To test these claims empirically one needs a measure of the two dimensions of property rights. …