Distributional Issues in Contracting for Property Rights

Property rights institutions critically affect incentives for decision-making regarding resource use and hence, economic behavior and performance.1 By allocating decision-making authority, property rights also determine who are the economic actors in a system and define the distribution of wealth in a society. Property rights institutions range from formal arrangements, including constitutional provisions, statutes, and judicial rulings to informal conventions and customs regarding the allocation and use of property. Because of their important functions, property rights have drawn increased research attention, particularly with regard to their impact on incentives. A continuing puzzle, though, is why we observe so much variety in the types of property institutions that exist. Some rights arrangements appear to be well structured to allocate resources to highvalued uses and to promote economic expansion, while others appear to limit decision flexibility and to instill incentives that retard economic growth. Given the crucial role of property rights systems in economic behavior, the question arises as to why seemingly perverse property rights persist. Differences in property rights institutions across societies with otherwise similar resource endowments contribute to observed variations in economic performance.2 Questions regarding the generic development of economic institutions have received considerable attention in recent years. In addition to analyses of the development of property rights, research has focused on the underlying reasons for the emergence of firms, rather than markets, to coordinate certain production activities.3 In general, the literature that has emerged is an optimistic one, viewing the design of institutions or governance structures as maximizing deci-