Paper #1588

Title:

Property rights in sequential exchange

Authors:

Benito Arruñada, Giorgio Zanarone and Nuno Garoupa

Date:

November 2017

Abstract:

We analyze the “sequential exchange” problem in which traders have incomplete information on earlier contracts. We show that under sequential exchange, it is in general not possible to simultaneously implement two key features of markets – specialization between asset ownership and control, and impersonal trade. In particular, we show that in contrast with the conventional wisdom in economics, strong property rights—enforceable against subsequent buyers—may be detrimental to impersonal trade. Finally, we provide conditions under which a mechanism that overcomes the tradeoff between specialization and impersonal trade exists, and we characterize such mechanism. Our results provide an efficiency rationale for how property rights are enforced in business, company and real estate transactions, and for the ubiquitousness of “formalization” institutions that the literature has narrowly seen as entry barriers.

Keywords:

Property rights, enforcement, contracts, incomplete information, impersonal exchange

JEL codes:

D23; D83; K11; K22

Area of Research:

Business Economics and Industrial Organization

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