Category Archives: Institutions – Micro Evidence

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.

Advertisements

PROPERTY RIGHTS AND INVESTMENT INCENTIVES

PROPERTY RIGHTS AND INVESTMENT INCENTIVES: THEORY AND EVIDENCE FROM GHANA

T. Besley

Journal of Political Economy Vol. 103, no. 5 (1995)

Principal Research Question and Key Result Do property rights stimulate investment, and if so through what mechanism do they do so? Using micro data from Ghana, Besley finds that property rights do indeed cause increased investment although it is not entirely clear from the data which mechanism is at work which is suggestive of a symbiotic relationship between rights and investment.

 

Theory Neo-classical theory states that if individuals are self-interested then they will increase investment in their property if they are secure in the belief that the benefits of the investment will accrue to them and will not be stolen by the state or any other party. This feeling of security will increase with the protection that property rights afford them.  Thus we should see underinvestment where there are poorly protected property rights.

Individualistic property rights need not increase investment in every case, for example individuals may care equally about all members of the community in which case the fact that land will revert to the community will not a disincentive to invest. Similarly if consumption is at community level then there is no necessary loss of efficiency from not have individual property rights. In fact if there are important negative externalities from investment then HAVING secure rights might actually reduce efficiency if there is  no way of internalizing the externalities. The problem comes when there is a lack of harmony as between the formal system of holding land, and the decisions individuals make – for example self-interested farmers working communal land as in much of Africa.

 

Motivation Recent literature highlights the importance of property rights as a precondition for growth. Given that in Africa there has been poor growth, and also a persistence of communal land holdings, this issue is particularly important there.

It is important for policy to know through which channel property rights affect investment. There are three possibilities from the literature:

  1. Individuals do not invest if the fruits of their labour can be stolen or expropriated. Here property rights act like a random tax where rule of law has broken down, or similar. Here the important rights are on a per field basis.
  2. If property rights means that individuals have better access to credit, then constraints on funding for investment can be eased. If land can be collateralized the bank will charge lower interest rate, and as individuals are assumed to set the marginal product of capital to marginal cost, then investment will increase. Here the important rights are at the household level i.e. a farmer can collateralize one field to invest on another.
  3. Investment is encouraged if improved transfer rights make it easier for individuals to rent or sell their land. Better defined transfer rights make it less costly to trade land, thus making it more likely that an owner can benefit from his investments. (Gains from trade theory)

 

Data Data are from two different regions in Ghana:

  1. Wassa – cocoa growing region where most land is owned. 217 households owner in 1074 fields. The only significant land improving investment is in planting trees. Mostly the land is owned outright.
  2. Anloga – 117 households with 494 fields, mostly growing shallots in small patches. Population density is higher, land is generally inherited, and a variety of investments can be made such as irrigation.

Rights are collected from survey data which ask if the occupier has right to sell, rent, gift, mortgage etc. and whether approval is needed from the lineage to exercise the right. The analysis is generally conducted on the number of rights a farmer has over any one field.

There is household data and some field level data that try to capture idiosyncratic characteristics.

 

Strategy Not possible to run simple OLS due to endogeneity problems. Put briefly investing in land by planting trees [or building a fence] could increase property rights, and this will cause an upward bias in the estimates. However, it is likely that that measure of property rights is measured with error which will tend to downward bias the results meaning that the eventual sign of bias is not known.

Thus an instrumental variables analysis is undertaken with the existence of a transfer deed, whether there has been litigation over the field, how the field was acquired, and how long the field has been owned, being used as instruments.

Investment is measured as 1 if the field has been improved since acquired and zero otherwise. This means that the model is a linear probability model.  A logit/probit model could have been used which would have ensured the coefficients were bounded by 0 and 1, however this would not have allowed for accounting for household/field heterogeneity by inclusion of fixed effects. The fixed effects allow for time invariant characteristics of the household such as investment ability to be controlled for. Observable field characteristics are also controlled for.

 

Results Wassa

An extra right with approval would appear to increase the probability of investment by 2.5%. In the fixed effects model only rights with approval are important, and having previously planted trees is also a driver of investment. Instrumenting increases the coefficient which suggests that measurement error was downward biasing the OLS results more than the endogeneity effect was upward biasing them. When instrumented the rights without approval coefficient is also greatly increased and significant at the 10% level.

Having purchased the field increased P(Invest) which fits with the gains from trade theory.

When household dummies are included the rights with approval become insignificant, and the rights without approval become large and significant. This suggests both that there is measurement error in the raw data, and also that the transfer of property rights are not necessarily what farmers care about when making investment decisions.

Anloga

An extra right is associated positively and significantly with most of the investment improvements considered as do improvements at the time of acquisition. Having to get lineage approval does not seem as important in this context.

The instruments pass the overidentification test [unlike for Wassa] and when instrumented for, the rights variables do not have significant coefficients. This could be being driven by small sample size, or more likely is that there is a symbiotic relationship between rights and the investments they appear to cause. Rights should therefore be thought of as things that farmers affect, and are not therefore simply exogenously given.

Robustness  
Problems External validity is always going to be a problem in these types of study. Indeed the problem can immediately be identified when it is seen that the results are so different for two communities within the same nation. The existing system of tenure will interact with any new rights conferred and thus we may see very different results depending upon the initial conditions.

The property rights index used is problematic as it just counts the number of rights so there is no scope for understanding the hierarchy of rights that may apply. If not all of the rights are equally important (which they surely are not) then we have measurement error in the independent variable.

The IV strategy leaves a lot to be desired. There is very little theoretical justification for using the IVs as described, and in the first stage they are shown to be rather weak even though they pass the joint F test. As with any IV approach we are only estimating a local average treatment effect, but without a strong theoretical justification for the use of the IVs it is not at all clear who the compliers would be.

The household fixed effects mean that if the collateral story is true we would see no causal effect as what is important is not the individual field characteristics, but of a field within the portfolio that can be collateralized in order to invest on a different field. Including a household dummy will soak up all the within household variation, and only looks at variation across households. Moreover, no time dummies are supplies, and the fixed effects cannot account for farmer specific and time variant characteristics such as if the investment ability/investment education were dynamic rather than simply fixed.

There may still be omitted variables such as geography of the land. Soil type is controlled for, but if farmers are less likely to invest on steep land then this should be included as well.

 

Implications Need more research. No one theoretical channel has been successfully identified. As rights and investment seem at times to be symbiotic we need to better understand where rights come from before we try to change rights policies. Property rights are not therefore strictly exogenous and as such land titling will not always been the economic panacea some claim them to be.