Emerging Trends in The Social and Behavioral Sciences · Property Rights and Development

Property Rights and Development

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Title: Property Rights and Development
extracted text: Property Rights and Development
TIMOTHY FRYE

Abstract
There is a strong consensus that secure property rights are critical for economic development, but tricky issues about the direction of causation and measurement have
made it difficult to demonstrate this relationship empirically. In recent years, scholars have made progress on these issues. In the future, scholars can profitably turn
their attention to four issues: (i) why privatization is so unpopular, (ii) how politics
shapes property rights, (iii) the distributional consequences of property rights, and
(iv) the impact of violence on property rights and economic development.

INTRODUCTION
There is a strong consensus that secure property rights are critical for economic development because they provide incentives for right holders to put
their assets to their most productive use. Where property rights are unclear,
poorly defined, or subject to arbitrary trespass by the state or other claimants,
right holders will have little incentive to use the asset productively and economic growth will suffer. Yet, if secure property rights are so beneficial to
society to economic growth, then why are they so rare? Why do property
rights take such different forms across countries and societies?
Property rights are typically treated as a bundle of rights, including the
right to use an asset, to earn income from an asset, and to transfer an asset
(Barzel, 1989). Property rights may be held by individuals, groups, or the
state. Property rights are never inviolable and use, income, and transfer rights
may be circumscribed in a variety of ways. States often put restrictions on the
use of property to protect broader social interests. Speed limits curtail the use
rights of car owners. Similarly, social norms may discourage right holders
from exercising certain rights.
Economic systems allocate property rights in a variety of ways. De jure
definitions of property rights seek to specify the use, income, and transfer
rights of assets precisely, but these formal legal depictions are never complete
because the costs of specifying fully all the different dimensions of property
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
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rights for every possible contingency are simply too great (Grossman & Helpman, 1986). De facto practices and social norms often fill this legal void, but
these informal means may be limited precisely because they lack formal legal
authority backed by the state. In addition, informal definitions of property
rights may be at odds with formal definitions, a contradiction which only
further erodes the clarity of property rights.
To give some idea of the complexity of property rights, consider Goldstein
and Udry’s (2008, p. 5) discussion of land tenure in Southern Ghana. They
note that “land is ‘owned’ by a paramount chief and is allocated [to individual farmers] locally through the matrilineage leadership … but land rights
are multifaceted. The act of cultivating a given plot may—or may not—also
be associated with the right to produce trees on the land, the right to lend
the plot to a family member, the right to rent out the land, the right to make
improvements, or the right to pass cultivation to one’s heirs … and these
many dimensions of lend tenure are ambiguous and negotiable.” Not surprisingly conflicts over land are common.
Property rights influence economic development through at least four
channels (Besley & Ghatak, 2010). First, secure property rights allow individuals to reap the fruits of their investment and efforts. Because much
economic activity requires upfront investments of time, capital, and effort
for benefits that accrue in the future, right holders are vulnerable to arbitrary
or unexpected changes in policy or laws. Where the holders of property
rights expect the government to change the tax rates after they incur the
sunk cost of investment, they will be reluctant to invest. This “commitment
problem” robs the investor of a potentially lucrative investment, but it also
robs the state of potential tax revenue.
Second, weak property rights compel economic agents to devote significant resources to defending their property rights rather than putting those
assets to more productive uses. Each additional worker hired to protect
property—be it a lawyer or a security guard—is a worker not hired to
produce.
Third, secure property rights can promote development by making it easier
to trade. Economic efficiency occurs when rights are assigned to those who
can use the asset most efficiently, but weak property rights may prevent this
beneficial outcome by deterring right holders from selling or renting their
assets to more productive agents. Landowners who have surplus land to sell
may be reluctant to do so absent confidence in the enforcement of contracts
with buyers. Fourth, where property rights are weak, the holders of property rights cannot use their property as collateral and this can cripple the
development of markets for credit and land.1
1. By some accounts, strong private property rights have also played a central role in protecting
democracy (Lindblom, 1977).

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FOUNDATIONAL WORK
Modern economics has enshrined strong property rights as a fundamental
tenet. Indeed, the core results of neoclassical economics rely on the assumption that property rights are perfectly defined and enforced without any cost.
This seemingly innocuous assumption led many economists to take property
rights for granted. This changed with Coase (1960), whose insights eventually led to the current resurgence of scholarly interest in property rights. In
“The problem of social cost,” Coase begins by arguing that if property rights
were perfectly defined and costless to enforce, then the initial distribution of
property rights would not matter for social welfare because owners would
simply exchange property rights until they reached an equilibrium outcome
that left everyone satisfied. Those able to obtain a higher economic gain from
exercising a property right could compensate parties injured by the owners’
exercise of that property right. For example, if bargaining was costless, then
steel producers could compensate those harmed by the pollution the steel
plant produces while still exercising its right to produce as much steel as
was profitable. This arrangement would leave both parties better off. Coase’s
argument marked a departure from prevailing thought, which argued that
government action was always needed to assign penalties to polluters in
order to make injured parties whole. More generally, Coase argued that in
the absence of transaction costs, market participants have many means to
organize their transactions efficiently without state regulation.
However, Coase went on to argue that because, in reality, the cost of
exercising property rights is never zero, the allocation of property rights
is critical. The costs to the steel producers of identifying all those harmed
by its pollution, measuring their losses, and paying compensation could
easily exceed the gains from exercising the right to produce steel, thereby
leading to social welfare losses. Indeed, many mutually beneficial exchanges
of property rights go unmade precisely because of the costs of transacting
outweigh the gains from exercising the right.2 Coase suggested that when
the transaction costs of exercising property rights were low, market-based
solutions involving negotiations between parties were likely most efficient.
However, when these costs were high, government regulation was likely
the best response. More generally, this insight laid the conceptual foundations for scholars to examine how a broad range of institutions from legal
and political systems to social ties and ethnicity shape the security and
distribution of property rights.
One central cost of transacting is enforcing property rights between
economic agents engaged in trade. Intertemporal trade raises the possibility
of buyers cheating sellers or vice versa. Absent confidence that sellers will
2. See Glaeser, Johnson, and Shleifer (2001) for a discussion and application of Coase.

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deliver the good tomorrow, buyers are reluctant to part with their cash
today. One large strand of research explores the great variety of institutional
solutions that economic agents have devised to promote trade. Milgrom,
North, and Weingast (1990) demonstrate how itinerant traders created a system of private courts that allowed buyers and sellers from all over medieval
Europe to exchange goods at the annual Champagne Fairs without a central
state. These private courts resolved disputes, shared information about
traders’ reputations for honesty, and barred traders who refused to abide by
court decisions from entering the Fair. Yet, scholars have also documented
frequent failures to create reliable institutions to protect property rights and
promote the mutually beneficial exchange even where it would make both
parties better off (Bates, 1984, 1989).
To increase the security of property rights, many scholars point to the state.
Thanks to its economies of scope and scale in the provision of public goods,
such as justice, and its monopoly on the legitimate use of violence, the state
is better suited than other organizations to protect property rights in many
instances. But state protection of property rights raises another problem:
states strong enough to protect property rights are also strong enough to
take property away. Similarly, states too disorganized to control their agents
are also hardly in a position to commit to protect property rights through
time (Frye & Shleifer, 1997; Shleifer & Vishny, 1993).
Another strand of literature on property rights focuses on the commitment
problem. That is, how can the owners of property be convinced that state
agents will not expropriate them after they invest or lend? North and
Weingast (1989) traced the great expansion in credit to the Crown to the
institutional constraints placed on the King by the Parliament following the
Glorious Revolution of 1688. In their telling, the English Crown paid high
interest rates before the Glorious Revolution because the Crown retained the
power to renege on loans at will. Anticipating default by the Crown, lenders
charged high rates or refused to loan. However, the institutional checks on
Royal fiscal policy placed on the Crown by Parliament after the Glorious
Revolution raised the costs to the Crown of reneging on its loans and led to
lower interest rates and a greater willingness to lend. Thus, the institutional
constraints created more secure property rights for lenders and allowed the
Crown to raise revenue far more efficiently. Other institutional solutions
to the commitment problem involve increasing the number of groups
needed to approve changes in policy, and the delegation of decision-making
authority to bureaucrats more insulated from political pressure, such as
central banks and courts (Stasavage, 2002).

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CUTTING-EDGE WORK
Much recent work on property rights has focused on identifying the causal
effects of property rights on economic development (Fenske, 2011). This
is difficult because property rights, just like many institutions, are rarely
randomly assigned in the real world. If, say, private and state property
rights were randomly assigned to firms, then we could compare the average performance of firms to determine whether state or private property
rights were associated with better performance. However, property rights
are often assigned in ways that are correlated with firm performance.
For example, if private property rights are granted to better performing
firms in the first place, then it is difficult to identify whether private
property or some other feature of firm is driving better performance. More
directly, politically powerful firms may have stronger property rights and
better performance, which makes it difficult to know whether political
power or stronger property rights is shaping economic performance.
The key is to find some way of identifying the impact of property rights
absent.
Scholars have made some progress in mitigating this problem. For example,
Acemoglu & Robinson (2001) find an instrument for good institutions: the
death rates of colonial settlers in the nineteenth century. Where the disease
environment for colonizers was benign, as in the United States, Canada, and
Australia, colonizers settled the lands and installed good institutions, such as
secure property rights, strong courts, and clear land titles. However, where
the disease environment prevented settlement by colonizers, as in the Congo
and Zaire, colonizers set up extractive institutions that allowed the colonizers
to engage in economic predation on a large scale. The institutions protecting
property rights were put in place for reasons not directly related to the quality
of institutions and because these institutions persisted over time, they ultimately led to rapid growth in the former and slow growth in the latter. The
key point is that the disease environment and subsequent settler mortality
rates are correlated with the quality of institutions, but not with subsequent
levels of economic development. Instrumenting for the quality of institutions
with the mortality of rates of settlers, they find that the quality of institutions
has a significant and substantially large impact on economic growth.3 Others have created instrumental variables for the quality of institutions based
on geography, population height, latitude, and exposure to natural disasters (c.f., Hall & Jones, 1999; Hidalgo, Naidu, Nichter, & Richardson, 2010).
3. Glaeser, Laporta, Lopez-de-Silanes, and Shleifer (2004) criticize this strategy because the settlers
not only brought their institutions with them but also their human capital. They attribute the high growth
rates of countries with low settler mortality rates at the time of colonization to the education and skill
level of the settlers.

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While these instrumental variables can be helpful, they are often difficult to
come by.
NATURAL EXPERIMENTS
Still other scholars have identified “natural experiments” in which property
rights are assigned “as if” randomly to right holders. Di Tella, Galiani and
Shargrodsky (2007) study how creating title to property shapes economic
behavior by studying squatters who were occupying an urban wasteland in
Argentina. In 1983, a law was passed assigning property rights to the squatters. Some, but not all, of the original owners of the land contested this decision in court and a lengthy legal process ensued. As a result, some squatters
received title to the land immediately, while those occupying land involved
in the court case did not. Di Tella, Galiani and Schargrodsky then demonstrated the importance of secure titles by finding that the group of squatters
with titles invested in their homes and their children’s education at higher
rates and also felt greater efficacy. Crucially, they find that groups with and
without titles are basically identical in all other respects, save for the possession of legal title. This allows them to identify the causal impact of legal title
on economic behavior.
Similarly, Field (2007) studied the efficiency gains from a massive project
that assigned property titles to 1.2 million Peruvians between 1996 and 2003.
Taking advantage of the staggered introduction of the program across neighborhoods, she finds that squatter households who had no legal claim to their
plot spent more than 13 hours per week defending their property. Squatter
households with legal titles worked 16 hours more per week than those without, demonstrating the importance of property rights. Related research finds
that squatter households with titles also had lower fertility rates and were
more likely to have invested in their residences (Field, 2004). Contra de Soto
(2000), they do not appear to increase access to credit.
Frye and Yakovlev (2014) explore how elections shapes property rights in
Russia by comparing the responses of businesspeople surveyed just before
and after the parliamentary elections of December 2011. Fortunately, those
interviewed before and after a parliamentary election were remarkably similar on factors that might shape property rights, such as size, sector, financial
condition, and personal characteristics of the managers. The “as if random”
timing of the interviews allows for a cleaner estimation of the impact of the
election on property rights.
Fisman (2001) examines how shocks to the health of President Sukarno in
Indonesia influenced the share price of companies with and without close
ties to the regime. Firms with Sukarno family members on their corporate
boards experienced significant declines in their share price in the wake of

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news about the deterioration of the President’s health, thereby demonstrating the impact of political connections on property rights. Researchers relying
on a natural experiment take advantage of unusual circumstances to isolate
the impact of property rights on economic behavior, but these opportunities
are relatively rare and leave analysts at the mercy of unexpected events and
historical quirks.
FIELD EXPERIMENTS ON PROPERTY RIGHTS
Field experiments involving randomized controlled trials have become
increasingly common in development economics and some scholars have
usefully applied this method to identify the causal impact of property rights.
By randomly assigning property rights to users, this approach introduces
an exogenous source of variation in property rights that can allow for
stronger causal inference (c.f., Blattman, Hartman, & Blair, 2014). However,
many aspects of property rights are not readily amenable to analysis via
field experiments because property rights are often an extension of political
power and are designed to deliver economic benefits to privileged groups
(c.f., Bates 1989; Engerman & Sokoloff, 2002). Reassigning property rights
raises deep political issues as right holders are likely to resist. Given the tight
link between property rights and political power, it is a special challenge to
design large-scale field experiments with random assignment of property
rights.
MEASUREMENT ISSUES
One of the central challenges to the study of property rights is measurement.
Property rights arrangements include formal and informal components
and capturing these different dimensions is often quite difficult. Formal
changes to property rights may bear weak resemblances to practices on
the ground (Ellickson, 1991). Using behavioral measures of the security of
property rights is another option. For example, some argue that investment
is a proxy for secure property rights. However, Besley (1995) notes that
investment itself may influence the security of property rights in some
settings. Using data from Ghana, he finds that planting trees raised the costs
of expropriation of land and thereby made property more secure. Others
have noted that profitable investments themselves may lead to conflict with
economic rivals, family members, or state agents (Place, 2009). These causal
identification and measurement challenges have been primary reasons for
the lack of progress in demonstrating the causal impact of property rights
on development (Fenske, 2011).

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FUTURE AREAS OF RESEARCH POLITICS OF PROPERTY RIGHTS
PUBLIC OPINION AND PROPERTY RIGHTS
Efforts to measure and identify the causal effects of property rights will
remain a topic of interest, but several other areas of research will also
likely dominate future studies of property rights. One puzzle is why
privatization—the transfer of rights from state agents to private agents—is
so unpopular. Even where privatization produces gains for society, it
remains deeply unpopular (World Bank, 2005). Surveys in 28 postcommunist countries conducted in 2006, found that a majority of respondents in
each country wanted to revise the status of industrial firms privatized after
the fall of communism. Moreover, only 20% of respondents favored the
current status quo (Denisova, Eller, Frye, & Zhuravskaya, 2012). At the same
time, only 30% of respondents favored returning these privatized firms to
state hands. Privatization is no more popular in Latin American where 60%
of respondents view privatization unfavorably (Panizza & Yanez, 2006).
Why popular opposition to privatization is so great is an open question.
Citizens may oppose the legitimacy of the process by which assets were privatized or they dislike the distribution of property after privatization. Finally,
they may simply prefer state property to private property. Denisova et al.
(2012) explore this issue in a postcommunist setting and find that low human
capital shapes support for revising privatization via a preference for state
property, but those who experience economic hardship oppose privatization
primarily on the grounds of the legitimacy of the process.
Other works have begun to probe public attitudes toward privatization and
private property. In the wake of the privatization and subsequent nationalization of water in Buenos Aires, Di Tella, Galiani, and Shargrodsky (2012) find
that those who gained access to water via privatization had a more favorable view of water privatization than those who did not, but that priming
subjects with anti-privatization information from the government nullified
this effect, suggesting the importance of both material interests and political
information. Yet, we do not know how widespread opposition to particular
forms of property rights can influence investment decisions. Expropriations
of property rights by populist leaders have been remarkably common over
the past 40 years, yet widespread opposition to privatization does not always
translate into expropriation (Guriev, Kolotilin, & Sonin, 2011).
POLITICS AND PROPERTY RIGHTS
The empirical study of property rights began with simple forms of property
rights in which the state and politics played little role (Demsetz, 1957;
Umbeck, 1981). Yet, recent studies have tried to incorporate how politics

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influences the distribution and impact of property rights on economic behavior. At a macro-level, Acemoglu and Robinson (2012) identify how state
institutions have increased the security of property rights and promoted
economic development through time. Others have studied the politics of
property rights on a micro-level. Goldstein and Udry (2008) study more than
500 small plots of land in Eastern Ghana over 2 years and find that politically
connected farmers are far less likely to have their land expropriated when it
is fallow and have far higher yield rates than those with weaker connections.
Similarly, women rarely risk keeping their land fallow out of fear that it
will be expropriated, and therefore achieve far lower yields than man.
Goldstein and Udry (2008, p. 26) note: “Rights over a particular plot of land
are political: they depend on the farmer’s ability to mobilize support for
their right over the spot.” Kwaja and Mian (2005) find that borrowers in
Pakistan who had run for office received loans on far more favorable terms
than those without political connections and were significantly more likely
to fail to repay their loans than their less politically connected rivals. Where
politics allocates property rights toward the most politically valuable rather
than the most efficient, economic development will suffer. A key issue for
policymakers and scholars is to develop a better understanding of how
political incentives shape property rights.
Autocratic countries exhibit particularly great variation in the security of
property rights, a topic that scholars are beginning to probe. Autocratic countries face particularly strong commitment problems given the much weaker
constraints on leaders compared to democratic countries. But autocrats vary
in their level of constraint. For example, Gehlbach and Keefer (2011) find that
one-party regimes such as China provide stronger institutional checks on
autocratic predation on property rights when compared to autocratic regimes
led by the military or by single individuals.4
Haber, Razo, and Maurer (2003) find that autocratic rulers in Mexico in the
early twentieth century mitigated the commitment problem in the oil sector
by creating a coalition of interests with foreign owners. Autocratic rulers who
had property rights over oil but not the technology to develop the resource,
formed a coalition with foreign companies who had the technology, but not
the access to the oil. In this trade of secure property rights for oil revenue,
successive autocrats had good reason to protect the property rights of foreign oil companies and foreign companies profited from this arrangement
by gaining access to oil. Indeed, it took the political revolution of 1938 and
the installation of the PRI government to break this coalition.

4. China offers a rich area for research given its variation in property types across regions and over
time (Lin, 1992).

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SECURE PROPERTY RIGHTS, BUT FOR WHOM?
As in other areas of political economy, scholars of property rights have
become less confident in large “n” cross national research in part due to
the difficulty of measuring property rights at the national level, and have
turned to studies that document how property rights have differential effects
on right holders. Some studies focus on why some groups have stronger
property rights than others. The standard argument is that the wealthy
prefer strong property rights that protect the political and economic status
quo (Engerman & Sokoloff, 2002). However, Sonin (2003) argues that where
the wealthy can park their assets in safe havens abroad, they may prefer
weak property rights at home because they will likely be taxed to pay for
strong property rights in their place of residence.
Lawson–Remer (2011) probes the paradox that the creation of secure property rights often involves the expropriation of politically vulnerable groups.
From the enclosure movement in Britain, to the imposition of colonial rule
in Africa, to the dispossession of the native population in the United States,
secure property rights are built upon and often coexist with weak property
rights for marginalized groups. Lawson–Remer finds that traditional measures of secure property rights typically capture the property rights of business people rather than those of politically marginal groups. Using a clever
measure, she finds little correlation between the strength of property rights
for business owners and for politically vulnerable groups. Her econometric
analysis finds that strong property rights for businesspeople are associated
with economic growth, but that the strength of property rights of politically
marginal groups are not correlated with economic growth. This raises the
normatively troubling question of whether the secure property rights of the
businesspeople come at the expense of politically marginal groups.
Why do some individuals and groups have stronger de facto property
rights when de jure property rights are identical? Under what conditions
do state officials allocate property rights based on political or economic
considerations?
VIOLENCE AND PROPERTY RIGHTS
At their core, property rights are about exclusion. Clear property rights
define who can use and gain income from assets and who cannot. Even
where changes in property rights may produce greater efficiency, they
also inevitably entail redistribution between groups and hence, conflict.
North, Wallis, and Weingast (2009) raise this issue most forcefully in their
reinterpretation of the rise of modern states. They focus explicitly on how
the limits and controls on wielders of influence shape long-run economic
development and the nature of social orders. In their view, the failure of

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societies to control the wielders of violence is a primary cause of why
countries fail to achieve their economic potential.
Contemporary Russia provides an excellent example. Volkov (2004)
describes the rise of “violent entrepreneurs” in his study of the evolution of
the market for private protection in Russia. With the collapse of the Soviet
state, private protection rackets thrived in Russia in the 1990s, but the advent
of higher oil prices and a natural advantage in scope and scale allowed state
protectors, such as the police and security forces, to outcompete private
protection rackets. In time, the police became monopolists in the sale of
protection which they provided primarily as a private good to those who
could pay. Recent years have seen a related phenomenon of hostile takeovers
(literally) undertaken in cooperation with the security forces (Gans-Morse,
2012; Markus, 2012). Kapeliushnikov, Kuznetsov, Demina, and Kuznetsova
(2013) find that firm owners in Russia who believe that their firm is more
likely to be the target of a hostile takeover invest at significantly lower
rates. Certainly, Russia is far from the only countries in which firms with a
comparative advantage in the use of violence play prominent roles in the
economy.
But access to violence also shapes economic outcomes on the micro-level.
Hidalgo et al. (2010) focus on land seizures by squatters across municipalities
in Brazil from 1988 to 2004. They find that negative economic shocks not
only lead to more land invasions but also that these effects are especially
pronounced in municipalities with high income inequality. While other
works have identified the direct effect of economic shocks on property
rights, this work also identifies how the local social structure conditions
this effect, thereby offering a more subtle and nuanced analysis. How to
curtail the wielders of violence is a central question for academics and
policymakers going forward.

CONCLUSION
Coase’s insights on property rights have made an enormous contribution to
economic thought; and over the past half century, scholars have produced
a remarkable body of work on the relationship between property rights and
economic development. Yet, from an academic perspective, there is still much
to be learned. Moreover, the substantive importance of the study of property rights is equally important. Understanding how different distributions
of property rights, and different institutional arrangements shape economic
and political behavior is surely an important means promote growth and
reduce poverty.

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per worker than others? Quarterly Journal of Economics, 114, 83–116.
Hidalgo, F. D., Naidu, S., Nichter, S., & Richardson, N. (2010). Economic determinants of land invasions. The Review of Economics and Statistics, 92(3), 505–523.
Kapeliushnikov, R., Kuznetsov, A., Demina, N., & Kuznetsova, O. (2013). Threats
to security of property rights in a transition economy: An empirical perspective.
Journal of Comparative Economics, 41, 245–264.
Kwaja, A. I. & Mian, A. (2005). Do lender favor politically connected firms? Rent
provision in an emerging financial market. Quarterly Journal of Economics, 120,
1371–1411.
Lawson-Remer, T. (2011). Security of property rights for whom (UNU-WIDER. Working
Paper. 2011/83). pp. 1–33.
Lin, J. (1992). Rural reform and agricultural growth in China. American Economic
Review, 82(1), 34–51.
Lindblom, C. (1977). Politics and markets: The world’s political economic systems. New
York, NY: Basic Books.
Markus, S. (2012). Secure property as a bottom-up process: Firms, stakeholders, and
predators in weak states. World Politics, 64(2), 242–277.

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Milgrom, P., North, D., & Weingast, B. (1990). The role of institutions in the revival of
trade: The law merchant, private judges, and the champagne fairs. Economics and
Politics, 2(1), 1–23.
North, D., Wallis, J. J., & Weingast, B. (2009). Violence and social orders: A conceptual
framework for interpreting recorded human history. New York, NY: Cambridge University Press.
North, D., & Weingast, B. (1989). Constitutions and commitment: The evolution of
institutions governing public choice in seventeenth century England. Journal of
Economic History, 4, 803–832.
Panizza, L., & Yanez, M. (2006). Why are Latin Americans so unhappy about reforms?
Journal of Applied Economics, 8, 1–29.
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Shleifer, A., & Vishny, R. (1993). Corruption. Quarterly Journal of Economics, 49,
599–617.
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of Comparative Economics, 31(4), 715–731.
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Weingast revisited. Journal of Law, Economics, and Organization, 18(1), 155–171.
Umbeck, J. (1981). Might makes rights: A theory of the formation and initial distribution of property rights. Economic Inquiry, 19, 38–54.
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and key changes. Washington, DC: World Bank.

TIMOTHY FRYE SHORT BIOGRAPHY
Timothy Frye is the Marshall D. Shulman Professor of Post-Soviet Foreign
Policy at Columbia University, the Director of the Harriman Institute
at Columbia University, and the Director of the Center for the Study
of Institutions and Development at the Higher School of Economics in
Moscow.
RELATED ESSAYS
The Public Nature of Private Property (Sociology), Debbie Becher
Intellectual Property (Economics), Michele Boldrin and David K. Levine
Lawmaking (Political Science), Jamie L. Carson and Mark E. Owens
Judicial Independence (Political Science), Tom S. Clark
The Evolving View of the Law and Judicial Decision-Making (Political
Science), Justine D’Elia-Kueper and Jeffrey A. Segal
Interdependence, Development, and Interstate Conflict (Political Science),
Erik Gartzke; Property Rights and Development
TIMOTHY FRYE

Abstract
There is a strong consensus that secure property rights are critical for economic development, but tricky issues about the direction of causation and measurement have
made it difficult to demonstrate this relationship empirically. In recent years, scholars have made progress on these issues. In the future, scholars can profitably turn
their attention to four issues: (i) why privatization is so unpopular, (ii) how politics
shapes property rights, (iii) the distributional consequences of property rights, and
(iv) the impact of violence on property rights and economic development.

INTRODUCTION
There is a strong consensus that secure property rights are critical for economic development because they provide incentives for right holders to put
their assets to their most productive use. Where property rights are unclear,
poorly defined, or subject to arbitrary trespass by the state or other claimants,
right holders will have little incentive to use the asset productively and economic growth will suffer. Yet, if secure property rights are so beneficial to
society to economic growth, then why are they so rare? Why do property
rights take such different forms across countries and societies?
Property rights are typically treated as a bundle of rights, including the
right to use an asset, to earn income from an asset, and to transfer an asset
(Barzel, 1989). Property rights may be held by individuals, groups, or the
state. Property rights are never inviolable and use, income, and transfer rights
may be circumscribed in a variety of ways. States often put restrictions on the
use of property to protect broader social interests. Speed limits curtail the use
rights of car owners. Similarly, social norms may discourage right holders
from exercising certain rights.
Economic systems allocate property rights in a variety of ways. De jure
definitions of property rights seek to specify the use, income, and transfer
rights of assets precisely, but these formal legal depictions are never complete
because the costs of specifying fully all the different dimensions of property
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

rights for every possible contingency are simply too great (Grossman & Helpman, 1986). De facto practices and social norms often fill this legal void, but
these informal means may be limited precisely because they lack formal legal
authority backed by the state. In addition, informal definitions of property
rights may be at odds with formal definitions, a contradiction which only
further erodes the clarity of property rights.
To give some idea of the complexity of property rights, consider Goldstein
and Udry’s (2008, p. 5) discussion of land tenure in Southern Ghana. They
note that “land is ‘owned’ by a paramount chief and is allocated [to individual farmers] locally through the matrilineage leadership … but land rights
are multifaceted. The act of cultivating a given plot may—or may not—also
be associated with the right to produce trees on the land, the right to lend
the plot to a family member, the right to rent out the land, the right to make
improvements, or the right to pass cultivation to one’s heirs … and these
many dimensions of lend tenure are ambiguous and negotiable.” Not surprisingly conflicts over land are common.
Property rights influence economic development through at least four
channels (Besley & Ghatak, 2010). First, secure property rights allow individuals to reap the fruits of their investment and efforts. Because much
economic activity requires upfront investments of time, capital, and effort
for benefits that accrue in the future, right holders are vulnerable to arbitrary
or unexpected changes in policy or laws. Where the holders of property
rights expect the government to change the tax rates after they incur the
sunk cost of investment, they will be reluctant to invest. This “commitment
problem” robs the investor of a potentially lucrative investment, but it also
robs the state of potential tax revenue.
Second, weak property rights compel economic agents to devote significant resources to defending their property rights rather than putting those
assets to more productive uses. Each additional worker hired to protect
property—be it a lawyer or a security guard—is a worker not hired to
produce.
Third, secure property rights can promote development by making it easier
to trade. Economic efficiency occurs when rights are assigned to those who
can use the asset most efficiently, but weak property rights may prevent this
beneficial outcome by deterring right holders from selling or renting their
assets to more productive agents. Landowners who have surplus land to sell
may be reluctant to do so absent confidence in the enforcement of contracts
with buyers. Fourth, where property rights are weak, the holders of property rights cannot use their property as collateral and this can cripple the
development of markets for credit and land.1
1. By some accounts, strong private property rights have also played a central role in protecting
democracy (Lindblom, 1977).

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3

FOUNDATIONAL WORK
Modern economics has enshrined strong property rights as a fundamental
tenet. Indeed, the core results of neoclassical economics rely on the assumption that property rights are perfectly defined and enforced without any cost.
This seemingly innocuous assumption led many economists to take property
rights for granted. This changed with Coase (1960), whose insights eventually led to the current resurgence of scholarly interest in property rights. In
“The problem of social cost,” Coase begins by arguing that if property rights
were perfectly defined and costless to enforce, then the initial distribution of
property rights would not matter for social welfare because owners would
simply exchange property rights until they reached an equilibrium outcome
that left everyone satisfied. Those able to obtain a higher economic gain from
exercising a property right could compensate parties injured by the owners’
exercise of that property right. For example, if bargaining was costless, then
steel producers could compensate those harmed by the pollution the steel
plant produces while still exercising its right to produce as much steel as
was profitable. This arrangement would leave both parties better off. Coase’s
argument marked a departure from prevailing thought, which argued that
government action was always needed to assign penalties to polluters in
order to make injured parties whole. More generally, Coase argued that in
the absence of transaction costs, market participants have many means to
organize their transactions efficiently without state regulation.
However, Coase went on to argue that because, in reality, the cost of
exercising property rights is never zero, the allocation of property rights
is critical. The costs to the steel producers of identifying all those harmed
by its pollution, measuring their losses, and paying compensation could
easily exceed the gains from exercising the right to produce steel, thereby
leading to social welfare losses. Indeed, many mutually beneficial exchanges
of property rights go unmade precisely because of the costs of transacting
outweigh the gains from exercising the right.2 Coase suggested that when
the transaction costs of exercising property rights were low, market-based
solutions involving negotiations between parties were likely most efficient.
However, when these costs were high, government regulation was likely
the best response. More generally, this insight laid the conceptual foundations for scholars to examine how a broad range of institutions from legal
and political systems to social ties and ethnicity shape the security and
distribution of property rights.
One central cost of transacting is enforcing property rights between
economic agents engaged in trade. Intertemporal trade raises the possibility
of buyers cheating sellers or vice versa. Absent confidence that sellers will
2. See Glaeser, Johnson, and Shleifer (2001) for a discussion and application of Coase.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

deliver the good tomorrow, buyers are reluctant to part with their cash
today. One large strand of research explores the great variety of institutional
solutions that economic agents have devised to promote trade. Milgrom,
North, and Weingast (1990) demonstrate how itinerant traders created a system of private courts that allowed buyers and sellers from all over medieval
Europe to exchange goods at the annual Champagne Fairs without a central
state. These private courts resolved disputes, shared information about
traders’ reputations for honesty, and barred traders who refused to abide by
court decisions from entering the Fair. Yet, scholars have also documented
frequent failures to create reliable institutions to protect property rights and
promote the mutually beneficial exchange even where it would make both
parties better off (Bates, 1984, 1989).
To increase the security of property rights, many scholars point to the state.
Thanks to its economies of scope and scale in the provision of public goods,
such as justice, and its monopoly on the legitimate use of violence, the state
is better suited than other organizations to protect property rights in many
instances. But state protection of property rights raises another problem:
states strong enough to protect property rights are also strong enough to
take property away. Similarly, states too disorganized to control their agents
are also hardly in a position to commit to protect property rights through
time (Frye & Shleifer, 1997; Shleifer & Vishny, 1993).
Another strand of literature on property rights focuses on the commitment
problem. That is, how can the owners of property be convinced that state
agents will not expropriate them after they invest or lend? North and
Weingast (1989) traced the great expansion in credit to the Crown to the
institutional constraints placed on the King by the Parliament following the
Glorious Revolution of 1688. In their telling, the English Crown paid high
interest rates before the Glorious Revolution because the Crown retained the
power to renege on loans at will. Anticipating default by the Crown, lenders
charged high rates or refused to loan. However, the institutional checks on
Royal fiscal policy placed on the Crown by Parliament after the Glorious
Revolution raised the costs to the Crown of reneging on its loans and led to
lower interest rates and a greater willingness to lend. Thus, the institutional
constraints created more secure property rights for lenders and allowed the
Crown to raise revenue far more efficiently. Other institutional solutions
to the commitment problem involve increasing the number of groups
needed to approve changes in policy, and the delegation of decision-making
authority to bureaucrats more insulated from political pressure, such as
central banks and courts (Stasavage, 2002).

Property Rights and Development

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CUTTING-EDGE WORK
Much recent work on property rights has focused on identifying the causal
effects of property rights on economic development (Fenske, 2011). This
is difficult because property rights, just like many institutions, are rarely
randomly assigned in the real world. If, say, private and state property
rights were randomly assigned to firms, then we could compare the average performance of firms to determine whether state or private property
rights were associated with better performance. However, property rights
are often assigned in ways that are correlated with firm performance.
For example, if private property rights are granted to better performing
firms in the first place, then it is difficult to identify whether private
property or some other feature of firm is driving better performance. More
directly, politically powerful firms may have stronger property rights and
better performance, which makes it difficult to know whether political
power or stronger property rights is shaping economic performance.
The key is to find some way of identifying the impact of property rights
absent.
Scholars have made some progress in mitigating this problem. For example,
Acemoglu & Robinson (2001) find an instrument for good institutions: the
death rates of colonial settlers in the nineteenth century. Where the disease
environment for colonizers was benign, as in the United States, Canada, and
Australia, colonizers settled the lands and installed good institutions, such as
secure property rights, strong courts, and clear land titles. However, where
the disease environment prevented settlement by colonizers, as in the Congo
and Zaire, colonizers set up extractive institutions that allowed the colonizers
to engage in economic predation on a large scale. The institutions protecting
property rights were put in place for reasons not directly related to the quality
of institutions and because these institutions persisted over time, they ultimately led to rapid growth in the former and slow growth in the latter. The
key point is that the disease environment and subsequent settler mortality
rates are correlated with the quality of institutions, but not with subsequent
levels of economic development. Instrumenting for the quality of institutions
with the mortality of rates of settlers, they find that the quality of institutions
has a significant and substantially large impact on economic growth.3 Others have created instrumental variables for the quality of institutions based
on geography, population height, latitude, and exposure to natural disasters (c.f., Hall & Jones, 1999; Hidalgo, Naidu, Nichter, & Richardson, 2010).
3. Glaeser, Laporta, Lopez-de-Silanes, and Shleifer (2004) criticize this strategy because the settlers
not only brought their institutions with them but also their human capital. They attribute the high growth
rates of countries with low settler mortality rates at the time of colonization to the education and skill
level of the settlers.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

While these instrumental variables can be helpful, they are often difficult to
come by.
NATURAL EXPERIMENTS
Still other scholars have identified “natural experiments” in which property
rights are assigned “as if” randomly to right holders. Di Tella, Galiani and
Shargrodsky (2007) study how creating title to property shapes economic
behavior by studying squatters who were occupying an urban wasteland in
Argentina. In 1983, a law was passed assigning property rights to the squatters. Some, but not all, of the original owners of the land contested this decision in court and a lengthy legal process ensued. As a result, some squatters
received title to the land immediately, while those occupying land involved
in the court case did not. Di Tella, Galiani and Schargrodsky then demonstrated the importance of secure titles by finding that the group of squatters
with titles invested in their homes and their children’s education at higher
rates and also felt greater efficacy. Crucially, they find that groups with and
without titles are basically identical in all other respects, save for the possession of legal title. This allows them to identify the causal impact of legal title
on economic behavior.
Similarly, Field (2007) studied the efficiency gains from a massive project
that assigned property titles to 1.2 million Peruvians between 1996 and 2003.
Taking advantage of the staggered introduction of the program across neighborhoods, she finds that squatter households who had no legal claim to their
plot spent more than 13 hours per week defending their property. Squatter
households with legal titles worked 16 hours more per week than those without, demonstrating the importance of property rights. Related research finds
that squatter households with titles also had lower fertility rates and were
more likely to have invested in their residences (Field, 2004). Contra de Soto
(2000), they do not appear to increase access to credit.
Frye and Yakovlev (2014) explore how elections shapes property rights in
Russia by comparing the responses of businesspeople surveyed just before
and after the parliamentary elections of December 2011. Fortunately, those
interviewed before and after a parliamentary election were remarkably similar on factors that might shape property rights, such as size, sector, financial
condition, and personal characteristics of the managers. The “as if random”
timing of the interviews allows for a cleaner estimation of the impact of the
election on property rights.
Fisman (2001) examines how shocks to the health of President Sukarno in
Indonesia influenced the share price of companies with and without close
ties to the regime. Firms with Sukarno family members on their corporate
boards experienced significant declines in their share price in the wake of

Property Rights and Development

7

news about the deterioration of the President’s health, thereby demonstrating the impact of political connections on property rights. Researchers relying
on a natural experiment take advantage of unusual circumstances to isolate
the impact of property rights on economic behavior, but these opportunities
are relatively rare and leave analysts at the mercy of unexpected events and
historical quirks.
FIELD EXPERIMENTS ON PROPERTY RIGHTS
Field experiments involving randomized controlled trials have become
increasingly common in development economics and some scholars have
usefully applied this method to identify the causal impact of property rights.
By randomly assigning property rights to users, this approach introduces
an exogenous source of variation in property rights that can allow for
stronger causal inference (c.f., Blattman, Hartman, & Blair, 2014). However,
many aspects of property rights are not readily amenable to analysis via
field experiments because property rights are often an extension of political
power and are designed to deliver economic benefits to privileged groups
(c.f., Bates 1989; Engerman & Sokoloff, 2002). Reassigning property rights
raises deep political issues as right holders are likely to resist. Given the tight
link between property rights and political power, it is a special challenge to
design large-scale field experiments with random assignment of property
rights.
MEASUREMENT ISSUES
One of the central challenges to the study of property rights is measurement.
Property rights arrangements include formal and informal components
and capturing these different dimensions is often quite difficult. Formal
changes to property rights may bear weak resemblances to practices on
the ground (Ellickson, 1991). Using behavioral measures of the security of
property rights is another option. For example, some argue that investment
is a proxy for secure property rights. However, Besley (1995) notes that
investment itself may influence the security of property rights in some
settings. Using data from Ghana, he finds that planting trees raised the costs
of expropriation of land and thereby made property more secure. Others
have noted that profitable investments themselves may lead to conflict with
economic rivals, family members, or state agents (Place, 2009). These causal
identification and measurement challenges have been primary reasons for
the lack of progress in demonstrating the causal impact of property rights
on development (Fenske, 2011).

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

FUTURE AREAS OF RESEARCH POLITICS OF PROPERTY RIGHTS
PUBLIC OPINION AND PROPERTY RIGHTS
Efforts to measure and identify the causal effects of property rights will
remain a topic of interest, but several other areas of research will also
likely dominate future studies of property rights. One puzzle is why
privatization—the transfer of rights from state agents to private agents—is
so unpopular. Even where privatization produces gains for society, it
remains deeply unpopular (World Bank, 2005). Surveys in 28 postcommunist countries conducted in 2006, found that a majority of respondents in
each country wanted to revise the status of industrial firms privatized after
the fall of communism. Moreover, only 20% of respondents favored the
current status quo (Denisova, Eller, Frye, & Zhuravskaya, 2012). At the same
time, only 30% of respondents favored returning these privatized firms to
state hands. Privatization is no more popular in Latin American where 60%
of respondents view privatization unfavorably (Panizza & Yanez, 2006).
Why popular opposition to privatization is so great is an open question.
Citizens may oppose the legitimacy of the process by which assets were privatized or they dislike the distribution of property after privatization. Finally,
they may simply prefer state property to private property. Denisova et al.
(2012) explore this issue in a postcommunist setting and find that low human
capital shapes support for revising privatization via a preference for state
property, but those who experience economic hardship oppose privatization
primarily on the grounds of the legitimacy of the process.
Other works have begun to probe public attitudes toward privatization and
private property. In the wake of the privatization and subsequent nationalization of water in Buenos Aires, Di Tella, Galiani, and Shargrodsky (2012) find
that those who gained access to water via privatization had a more favorable view of water privatization than those who did not, but that priming
subjects with anti-privatization information from the government nullified
this effect, suggesting the importance of both material interests and political
information. Yet, we do not know how widespread opposition to particular
forms of property rights can influence investment decisions. Expropriations
of property rights by populist leaders have been remarkably common over
the past 40 years, yet widespread opposition to privatization does not always
translate into expropriation (Guriev, Kolotilin, & Sonin, 2011).
POLITICS AND PROPERTY RIGHTS
The empirical study of property rights began with simple forms of property
rights in which the state and politics played little role (Demsetz, 1957;
Umbeck, 1981). Yet, recent studies have tried to incorporate how politics

Property Rights and Development

9

influences the distribution and impact of property rights on economic behavior. At a macro-level, Acemoglu and Robinson (2012) identify how state
institutions have increased the security of property rights and promoted
economic development through time. Others have studied the politics of
property rights on a micro-level. Goldstein and Udry (2008) study more than
500 small plots of land in Eastern Ghana over 2 years and find that politically
connected farmers are far less likely to have their land expropriated when it
is fallow and have far higher yield rates than those with weaker connections.
Similarly, women rarely risk keeping their land fallow out of fear that it
will be expropriated, and therefore achieve far lower yields than man.
Goldstein and Udry (2008, p. 26) note: “Rights over a particular plot of land
are political: they depend on the farmer’s ability to mobilize support for
their right over the spot.” Kwaja and Mian (2005) find that borrowers in
Pakistan who had run for office received loans on far more favorable terms
than those without political connections and were significantly more likely
to fail to repay their loans than their less politically connected rivals. Where
politics allocates property rights toward the most politically valuable rather
than the most efficient, economic development will suffer. A key issue for
policymakers and scholars is to develop a better understanding of how
political incentives shape property rights.
Autocratic countries exhibit particularly great variation in the security of
property rights, a topic that scholars are beginning to probe. Autocratic countries face particularly strong commitment problems given the much weaker
constraints on leaders compared to democratic countries. But autocrats vary
in their level of constraint. For example, Gehlbach and Keefer (2011) find that
one-party regimes such as China provide stronger institutional checks on
autocratic predation on property rights when compared to autocratic regimes
led by the military or by single individuals.4
Haber, Razo, and Maurer (2003) find that autocratic rulers in Mexico in the
early twentieth century mitigated the commitment problem in the oil sector
by creating a coalition of interests with foreign owners. Autocratic rulers who
had property rights over oil but not the technology to develop the resource,
formed a coalition with foreign companies who had the technology, but not
the access to the oil. In this trade of secure property rights for oil revenue,
successive autocrats had good reason to protect the property rights of foreign oil companies and foreign companies profited from this arrangement
by gaining access to oil. Indeed, it took the political revolution of 1938 and
the installation of the PRI government to break this coalition.

4. China offers a rich area for research given its variation in property types across regions and over
time (Lin, 1992).

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

SECURE PROPERTY RIGHTS, BUT FOR WHOM?
As in other areas of political economy, scholars of property rights have
become less confident in large “n” cross national research in part due to
the difficulty of measuring property rights at the national level, and have
turned to studies that document how property rights have differential effects
on right holders. Some studies focus on why some groups have stronger
property rights than others. The standard argument is that the wealthy
prefer strong property rights that protect the political and economic status
quo (Engerman & Sokoloff, 2002). However, Sonin (2003) argues that where
the wealthy can park their assets in safe havens abroad, they may prefer
weak property rights at home because they will likely be taxed to pay for
strong property rights in their place of residence.
Lawson–Remer (2011) probes the paradox that the creation of secure property rights often involves the expropriation of politically vulnerable groups.
From the enclosure movement in Britain, to the imposition of colonial rule
in Africa, to the dispossession of the native population in the United States,
secure property rights are built upon and often coexist with weak property
rights for marginalized groups. Lawson–Remer finds that traditional measures of secure property rights typically capture the property rights of business people rather than those of politically marginal groups. Using a clever
measure, she finds little correlation between the strength of property rights
for business owners and for politically vulnerable groups. Her econometric
analysis finds that strong property rights for businesspeople are associated
with economic growth, but that the strength of property rights of politically
marginal groups are not correlated with economic growth. This raises the
normatively troubling question of whether the secure property rights of the
businesspeople come at the expense of politically marginal groups.
Why do some individuals and groups have stronger de facto property
rights when de jure property rights are identical? Under what conditions
do state officials allocate property rights based on political or economic
considerations?
VIOLENCE AND PROPERTY RIGHTS
At their core, property rights are about exclusion. Clear property rights
define who can use and gain income from assets and who cannot. Even
where changes in property rights may produce greater efficiency, they
also inevitably entail redistribution between groups and hence, conflict.
North, Wallis, and Weingast (2009) raise this issue most forcefully in their
reinterpretation of the rise of modern states. They focus explicitly on how
the limits and controls on wielders of influence shape long-run economic
development and the nature of social orders. In their view, the failure of

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societies to control the wielders of violence is a primary cause of why
countries fail to achieve their economic potential.
Contemporary Russia provides an excellent example. Volkov (2004)
describes the rise of “violent entrepreneurs” in his study of the evolution of
the market for private protection in Russia. With the collapse of the Soviet
state, private protection rackets thrived in Russia in the 1990s, but the advent
of higher oil prices and a natural advantage in scope and scale allowed state
protectors, such as the police and security forces, to outcompete private
protection rackets. In time, the police became monopolists in the sale of
protection which they provided primarily as a private good to those who
could pay. Recent years have seen a related phenomenon of hostile takeovers
(literally) undertaken in cooperation with the security forces (Gans-Morse,
2012; Markus, 2012). Kapeliushnikov, Kuznetsov, Demina, and Kuznetsova
(2013) find that firm owners in Russia who believe that their firm is more
likely to be the target of a hostile takeover invest at significantly lower
rates. Certainly, Russia is far from the only countries in which firms with a
comparative advantage in the use of violence play prominent roles in the
economy.
But access to violence also shapes economic outcomes on the micro-level.
Hidalgo et al. (2010) focus on land seizures by squatters across municipalities
in Brazil from 1988 to 2004. They find that negative economic shocks not
only lead to more land invasions but also that these effects are especially
pronounced in municipalities with high income inequality. While other
works have identified the direct effect of economic shocks on property
rights, this work also identifies how the local social structure conditions
this effect, thereby offering a more subtle and nuanced analysis. How to
curtail the wielders of violence is a central question for academics and
policymakers going forward.

CONCLUSION
Coase’s insights on property rights have made an enormous contribution to
economic thought; and over the past half century, scholars have produced
a remarkable body of work on the relationship between property rights and
economic development. Yet, from an academic perspective, there is still much
to be learned. Moreover, the substantive importance of the study of property rights is equally important. Understanding how different distributions
of property rights, and different institutional arrangements shape economic
and political behavior is surely an important means promote growth and
reduce poverty.

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14

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TIMOTHY FRYE SHORT BIOGRAPHY
Timothy Frye is the Marshall D. Shulman Professor of Post-Soviet Foreign
Policy at Columbia University, the Director of the Harriman Institute
at Columbia University, and the Director of the Center for the Study
of Institutions and Development at the Higher School of Economics in
Moscow.
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