PROPERTY RIGHTS: MICRO EVIDENCE

PROPERTY RIGHTS: MICRO EVIDENCE

Notes 

General

There is macro evidence that property rights are important for economic outcomes such as income and growth. However, macro studies find it hard to conclusively prove that causality runs from rights to economic outcomes. Instrumental variable analysis is seductive, however, in the case of case of settler mortality in the work or AJR, this might just be capturing levels of human capital, and in general there may be other correlated unobservable (such as other institutions). Additionally there are issues relating to the comparability of institutions across countries. Micro evidence aims to explore exogenous variation in rights within countries or regions in order to offer stronger evidence for the flow of causality. The downside to micro studies is of course that they are heavily context dependent and the results may not be generalizable to other settings.

There are several channels through which property rights might affect incomes and growth.

  1. Investment – Individuals do not invest if the fruits of their investment can be stolen or expropriated. Expropriation acts like a random tax on investment and so individuals will underinvest.
  2. Collateral – If property rights enable land to be used as collateral for access to formal credit, then land rights may increase investment in physical/human capital by lowering the marginal cost of capital. People invest until the marginal return to investment equals the margin cost (interest rate) and if being able to provide collateral lowers the interest rate, people will invest more.
  3. Less time defending land – if people with insecure title are compelled to spend time at home in order to protect themselves from eviction or theft then this can reduce the amount of labour supplied to the market, decreasing aggregate output and personal income.
  4. Incorporates people into the citizenry – having property rights might change people’s beliefs about society and hence encourage them to participate more directly with formal labour markets, public goods, political processes etc.

Could they be bad? Yes, as Besley notes if individuals care equally about every member of the community, and the land is due to revert to the community after death/transfer, then this may have no effect on the incentive to invest. Similarly, if consumption is at community level then this need not disincentivize investment. However, in this case if there are significant externalities from investment then having property rights might actually reduce efficiency (e.g. if irrigation takes water away from other farmers in the community), if those externalities cannot be internalized. The problem comes when there is a lack of harmony between the formal system of land holding, and the decisions individuals make, for example in Africa where consumption is at the individual level, but land is held at community level.

Additionally, if property rights are provided by the central government they may crowd out local institutions.

                                                                                                               

 

Entitled to Work: Urban Property Rights and Labour Supply in Peru E. Field (Quarterly Journal of Economics 2007)

 

In a Nutshell

Land titling may affect investment incentives and credit access. This is well documented. However, the alternative (complementary) channel examined here is the effect that property rights can have on labour supply by transferring the role of property protection from the individual/community to the state. The idea is that as a consequence of titling, individuals have time freed up which they previously devoted to solidifying informal claims as there is increased ownership security. The paper uses data from Peru which saw a huge tilting programme whereby 1.2m households were given title where they previously had none. Using the fact that the programme was staggered allows for a comparison of households in neighborhoods that had already been targeted with those that had not in a difference in difference estimation.

In Peru there were wide reports of community organizations that protected property rights in urban squatter settlements. Participation in these organizations could substantially have hindered labour market opportunities. Assuming that there is incomplete substitution between the individual protecting his own home and hiring someone else to do it (due to income constraints, and lack of social capital – trust), this implies that strengthening formal rights decreases the need for households to spend time on home protection thus decreasing the amount of work undertaken at home, and increasing the amount of labour supplied to the market. This effect will be decreasing in the level of informal rights the household has (as measured by the length of tenure) and the size of the household (as chances are that in larger households someone will be home irrespective of the need to provide property protection). Additionally it could affect child labour if children act as a substitute for adult workers and go out to work (as they are unable to protect the home).

The results indicate that households with no title spend 13.4 hours per week maintaining informal tenure reflecting a 14% reduction in total household work hours for the typical squatter family. Household members are 40% more likely to work inside their own home. The effect of the titling programme was that 16 extra hours were worked per week for those reached by the programme, and they were half as likely to be found working at home. This effect is decreasing in informal tenure and family size, as predicted.

There are a couple of caveats here. Firstly, it is not possible to state conclusively that the mechanism is the freeing up of time previously devoted to protection. Whilst this seems likely, it is also possible that the marginal utility of labour increased as people felt more secure in investing in their domestic infrastructure. Either way the labour supply increased though. Secondly, this is a study of the urban environment. Given that in rural settings most people are working their own land (agriculture) there is presumably a much lesser degree of tradeoff between labour and protection. Thus we would not expect to see the same results (for the same reason at least) in rural settings. Lastly, Peru is quite a specific context, it may be that in other regions there is less community policing, or less threat of eviction. Additionally, if informal land holders increase their informal tenure by investing in the land then there may be regions where this past investment now acts as de facto property rights, and a formal title might actually make little difference.

                                                                                                               

 

Property Rights and Finance Johnson et al. (The American Economic Review Vol. 92, No. 5 2002 pp. 1335-56)

 

In a Nutshell

This paper builds on the Besley paper summarized elsewhere this week. He finds a significant link between property rights and investment. This paper asks whether in addition to secure property rights, the availability of external finance is necessary for entrepreneurs to invest. Looking at the Eastern European countries that share similar institutional environments but different levels of property rights, they survey firms about their perceived property rights and use this to evaluate investment decisions measured as how much of a firm’s profits are reinvested.

They find a robust correlation between the amount a firm chooses to invest and their measure of property rights regardless of the ability of those firms to access external financing. This indicates that at low levels of development property rights are a necessary and sufficient condition for investment. This might indicate that financial development need come only after the securing of property rights.

There are lots and lots of issues with this paper. Firstly they only survey existing firms, so the results say nothing about the interaction between property rights and access to finance as it applies to entrepreneurs. Secondly the measure of property rights is quite bizarre, and is more related to corruption than property rights, and whilst the two might be related they are by no means synonymous.  Additionally, the firms in question typically had very high levels of retained earnings, and as such they did not need to rely on external financing, which might indicate why financing showed no effect upon reinvestment.

                                                                                                               

 

The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters Di Tella et al. (QJE 2007)

 

This paper uses evidence from Argentina whereby by a quirk of the law some squatter in a community were given land titles, and others were not. In subsequent surveys they found that the beliefs of those with title were much more aligned with what might be called market principals of individualism etc. Given the close proximity and shared history of the squatters and the exogenous change in land title, the authors ascribe this change in beliefs to the holding of property rights. In other words there may be some psychological benefits from land rights that inspire more interaction with the economy.

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