Edited by Enrico Colombatto
Chapter 5: The Effect of Transaction Costs in the Definition and Exchange of Property Rights: Two Cases from the American Experience
5 The effect of transaction costs in the deﬁnition and exchange of property rights: two cases from the American experience Gary D. Libecap Introduction: transaction costs, institutional change and economic welfare Recent research examining cross-country differences in economic growth points to the importance of the institutional structure of a society in explaining observed variations in performance. In particular, institutions that include clearly deﬁned and judiciously enforced private property rights appear to play key roles in promoting economic growth and welfare (North 1990; Barro 1991, 1996, 1997; Shleifer and Vishny 1993; Alston et al. 1996; Acemoglu et al. 2001a, 2001b). Given the observed importance of the property rights structure, one might predict that individuals would mobilize to bring about institutional change whenever there were net beneﬁts of doing so. These new arrangements would allow resources to ﬂow more easily and quickly to higher-valued uses and support increased levels of trade and investment. The resulting higher levels of economic growth would motivate the parties to more precisely deﬁne and enforce property rights. Indeed, Demsetz (1967) and Davis and North (1972) optimistically hypothesized just such a beneﬁcial process of institutional change. They suggested that shifts in factor and product prices and the development of new technologies would encourage individuals to reﬁne property rights so as to take advantage of new market opportunities. Neither Demsetz nor Davis and North, however, detailed this process of institutional change, and unfortunately, as is often the case, the devil is in the...
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