Carmine Guerriero, ‘Property Rights, Transaction Costs, and the Limits of the Market’

Although property rights and transaction costs are key, their determinants and interaction are poorly understood. Within trade interactions, a rise in transaction costs has the welfare-decreasing marginal effect of pushing some high-valuation potential buyers to expropriate the original owners’ property and the infra-marginal effect of decreasing the social gains from the transfers that continue to be consensual. Then, it must also reduce the protection of property rights, which is the probability of unsuccessful private expropriation. This pattern holds true regardless of whether transaction costs are driven by frictions, outside the control of the traders, or endogenously determined by the mix of the dispersion in their valuations and the original owners’ market power and/or privileged information. A similar conclusion applies to an upstream firm’s property rights on an input, necessary to a downstream firm to innovate and whose cost is random and ex ante non contractible. Then, transaction costs increase with the likelihood of a low cost. These implications survive if a group of agents has a larger political influence on institutional design and if the disincentive effect of weak property rights is considered. The model predictions are consistent with the negative effects of proxies for transaction costs on measures of the protection of personal, intellectual, and financial property that I document for a panel of 135 countries spanning the 2006-2015 period. This evidence implies that the negative correlations between weak property rights and economic outcomes might be partly spurious.

Guerriero, Carmine, Property Rights, Transaction Costs, and the Limits of the Market (November 22, 2018).

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