Having analyzed the causes that allow properties to be kept in the public domain, I can now address the issue of the formation of economic (though not necessarily legal) rights. It might be tempting to trace the pattern of currently existing property rights holdings to its point of origin to determine how and why it came about, yet such an effort would be futile. The ability to consume commodities, including those necessary to sustain life, implies the possession of rights over them. Once this is understood, it becomes clear that one cannot expect to discover any evidence of a pre–property rights state, since it is not possible to endow a pre–property rights state of affairs with meaning. In order to gain a toehold on the evolution of property rights, one must start with the simultaneous emergence of life and property rights and then consider a world where some rights are already in place. One must resort to something less dramatic than, but similar to, the physicist's big-bang theory. Once some rights are already in existence, it is possible to explore their evolution with respect to changes in economic conditions and legal constraints.

Inferences about the creation of property rights may be drawn by studying instances of anarchy or violent upheaval that necessitated radical acts of rights redefinition. A spectacular example is that of the California gold rush, described and analyzed in detail by Umbeck (1977).

People have discretion over how to delineate rights, and as part of their maximization effort they do so to whatever degree they desire. Rights are never perfectly delineated, however, because the fact that commodities are not uniform and are expensive to measure makes perfect delineation prohibitively costly. Nevertheless, since people do what they deem “best,” rights may be said to be always well delineated.

Those properties that people choose not to delineate are in the public domain. Such properties include much of the world's oceans; they also include the cool air in air-conditioned shopping malls, which is not charged for on the margin. Properties in the public domain can be augmented or diminished. As the values of commodities and of commodity attributes change, and as the costs of delineation and of protection change, people's decisions regarding what to leave in, what to relinquish, and what to reclaim from the public domain change correspondingly.

The public domain is ubiquitous; innumerable commodity attributes are placed in it. Any service not fully charged for on the margin is at least partly relinquished to the public domain. Owners could charge for such services, but the extra returns often do not justify the extra costs. For instance, concert-hall owners relinquish to the public domain the differential in valuation among equally priced seats. When the value of concert-hall seats falls – which might happen when the hall is used by a local choir rather than a famous opera star – seats are expected to be priced in lesser detail.

The property rights approach to the study of economics has been promoted by market-oriented economists, who have used it occasionally to demonstrate the superiority of the market. Contrary to the perception that property rights tools may best be used to analyze the market economy, where allocation is performed largely if not entirely by prices, these tools seem to be uniquely well suited to analyzing resource allocation in non-market settings. Under the Walrasian approach, where rights are perfectly defined, nothing is lost by quickly dispensing with the topic of property rights, for there is little to say about them within that model, where prices determine everything. Indeed, the Walrasian model may provide satisfactory answers to many problems in capitalist economies, where prices play a vital role in economic life.

Those economists who have contributed most to the study of property rights tend to be strong advocates of unregulated markets. They contend that people and the economy thrive when left to their own devices, and that government intervention tends to reduce wealth. In the market, the argument goes, prices move resources to their highest-value uses; when prices are not given the opportunity to perform their function, misallocation results. Government intervention is deemed acceptable in such areas as national defense, police, the courts, and the money supply; such intervention is said to be desirable only inasmuch as it facilitates the functioning of markets. Despite the prevalence of this reasoning, government regulations cannot be dismissed on a priori grounds.

The intellectual content of “property rights,” a term that has enchanted and occasionally mesmerized economists, seems to lie within the jurisdiction of the legal profession. Consistent with their imperialist tendencies, however, economists have also attempted to appropriate it. Both disciplines can justify their claims, since the term is given different meanings on different occasions. Perhaps economists should initially have coined a term distinct from the one used for legal purposes, but by now the cost of doing so is too high. I attempt, however, to make clear the meaning I give to “property rights” and to demonstrate why property rights so defined are an appropriate subject for economic analysis.

The material of the book is at the heart of a course I have taught in recent years. Undergraduate students take my approach in stride. Graduate students often vigorously resist my dissatisfaction with the zero transaction costs model; converting them is, however, rewarding. This book is influenced by the diverse classroom reactions. It is an attempt to appeal both to those with little training in economics and to specialists.

I am grateful to my former students Douglas Allen and Dean Lueck and to my colleague Paul Heyne, who read early drafts of the book and forced me to reformulate many of my ideas and to clarify their presentation. Douglass North, who supported the project from its infancy, also read the entire manuscript and made numerous valuable suggestions. Victor Goldberg and Levis Kochin provided useful comments as well. I also thank Elizabeth Case and my daughter Tamar for excellent editing; they demonstrated that clear writing enhances clear thinking. Finally, I wish to thank the Earhart Foundation for financial support.

At the heart of the study of property rights lies the study of contracts. Contracts, whether formal or informal, reallocate rights among contracting parties. I will focus here on private contracts that are enforceable by the courts and the police. The tenancy contract between tenant and landlord – between the owner of labor and the owner of land – is relatively simple and is thus a suitable point from which to begin the study of contracts.

On a family farm, a single operator or a single family – the owner of labor – undertakes the bulk of farm activities. Family farming is common and relatively simply organized. By studying tenancy contracts in the context of family farming, it is possible to isolate some basic contracting problems that may be obscured in more complex organizations. As a background to the analysis of the tenancy contract I offer a critical review of the traditional approach to the relationship between tenant and landlord.

THE SHARE CONTRACT AND CHEUNG'S CONTRIBUTION

Price theory textbooks routinely introduce the notion of a production function and discuss the marginal product of a factor such as labor for given levels of such other factors as capital and land. Given the productivity of the factors and the market prices of factors and products, it is easy to determine both the optimum amounts and the values of the contributions of each factor.

In the following discussion an elaboration of a single example – the gasoline price controls of the 1970s – serves to illustrate the usefulness and power of the property rights framework. It also introduces tools that are useful in analyzing situations not subject to government intervention, in which the price of a commodity (or a commodity-attribute) differs from the (supposed) market clearing price.

Chapter 1 presented a property rights proposition central to this book: Given that property rights are never perfectly delineated, some valued properties will always be in the public domain. In the present chapter the nature of maximization, as affected by properties in the public domain, will be examined and the actual resolutions of several public domain issues will be analyzed. Because an analysis of rationing by waiting offers a convenient introduction to the subject of property rights, I will briefly concentrate on such an analysis; subsequent discussion will provide a more detailed analysis of maximization under price controls, which will highlight major features of the substance and the mechanics of property rights.

RATIONING BY WAITING

The rationing by waiting model used here, which is stripped of many real-world features, is most elementary. Using this model makes it easy to concentrate on the public domain issue while ignoring peripheral problems. I will use the results of this basic analysis in my subsequent analysis of the price controls placed on gasoline in the early 1970s.

The economists who first adopted the property rights framework in their analyses often considered any government restrictions on those rights (“attenuation of rights”) to be undesirable. A person's ability to realize the potential value of his or her property depends on the extent of his or her property rights, which consists of the ability to use (and exclude), to alienate, and to derive income from the property. The ability, or power, to exclude prevents the property from becoming common property, and the ability to alienate and to derive income permits the realization of gains from exchange. Since restrictions generally reduce freedom of action, restrictions on a person's property rights reduce the value of the property to its owner. Thus it would appear that such restrictions are harmful. In this section I will demonstrate that restrictions that seem to attenuate rights in fact often help to delineate rights more clearly.

Restrictions, that is, non-price allocations, can have no useful role in the Walrasian model. According to that model prices alone can direct all resources into their highest-value uses and will yield efficient allocation, since price adjustments are costless and rights are well defined. Restrictions, then, are at best superfluous and may well result in lower output. The unfavorable attitude by economists toward restrictions on, or attenuation of, rights may reflect the implicit application of the Walrasian, costless-transacting model.

In spite of the Walrasian model, restrictions on individuals' freedom to do what they wish with “their” property are widespread even in capitalist market economies.

For many years the theory of economic organization was nearly synonymous with the theory of the firm. Standard economics textbooks occasionally referred to other forms of organization, such as the family and government, but the firm was the only organization consistently and systematically discussed. Nevertheless, the exact function of the firm remained unclear. Knight's (1921) attempt to add substance to the construct called the “firm” did not fare very well, and Coase's (1937) revolutionary approach to organization required several decades, as well as his own work on social cost, to begin to influence economists. Both of these efforts focused on the firm. In more recent years, Coase's transaction cost ideas have been exploited by economists attempting to generate a theory of the firm, as well as by others who question the usefulness of such a theory. The insights gained through these efforts have been considerable, yet our understanding of organization is only in its infancy. In this chapter the transaction cost approach to organization will be extended.

In order to appreciate the need for the transaction cost approach and its contribution, one must first examine the received model of the firm extensively and critically. I attempt to show that as a description of real firms the received model is untenable, and that under conditions that would allow a textbook firm to exist, its function would become inconsequential. Turning to general problems of organization, I first consider the distinction between market and firm transactions and the significance of Coase's discussion of liability.

The Cambridge Series on the Political Economy of Institutions and Decisions is built around attempts to answer two central questions: How do institutions evolve in response to individual incentives, strategies, and choices? How do institutions affect the performance of political and economic systems? The scope of the series is comparative and historical rather than international or specifically American, and the focus is positive rather than normative.

The first edition of this work has become the classic statement of the property rights paradigm. In this second edition Yoram Barzel clarifies, elaborates, and extends the argument. Clarifications consist of more straightforward writing and making effective use of diagrams to illustrate complex theoretical points. Elaboration takes the form of greater depth of analysis in various sections of the study; for example, the old chapter “The Old Firm and the New Organization” has been divided into two chapters that now include new sections on divided ownership and on insurance. Barzel extends the argument to the role of the state in the formation of rights, the role of government in lowering transaction costs, and property rights to wildlife.

The property rights model developed in this book is an important extension and modification of economic theory, explaining an array of phenomena that standard theory cannot successfully address.

THE DEFINITION OF ECONOMIC AND LEGAL RIGHTS

What are property rights? The term “property rights” carries two distinct meanings in the economic literature. One, primarily developed by Alchian (1965, 1987) and Cheung (1969), is essentially the ability to enjoy a piece of property. The other, much more prevalent and much older, is essentially what the state assigns to a person. I designate the first “economic (property) rights” and the second “legal (property) rights.” Economic rights are the end (that is, what people ultimately seek), whereas legal rights are the means to achieve the end. In this book I am concerned primarily with economic rights. Legal rights play a primarily supporting role – a very prominent one, however, for they are easier to observe than economic rights.

I define the economic property rights an individual has over a commodity (or an asset) to be the individual's ability, in expected terms, to consume the good (or the services of the asset) directly or to consume it indirectly through exchange. According to this definition, an individual has fewer rights over a commodity that is prone to theft or restrictions on its exchange.

The notion of rights is closely related to that of residual claimancy. The residual claimant to, say, an apartment house is its economic owner in that he is able to gain (here by exchange) from an increase in the value of the building, whereas he loses from a reduction in that value.

A RETURN TO FREE MARKET CONCEPTIONS: WHY?

The conceptions about the self-regulating mechanisms associated with markets have undergone the equivalent of a long wave. During the Great Depression of the 1930s, a majority of economists were critical of the institutional impediments to the free functioning of markets. Only a minority argued that it was in the very nature of free markets to trigger large instabilities and/or stagnation (Weir and Skocpol, 1985). After World War II, the Keynesian heterodoxy became the core of significant revolution concerning the respective roles that the state and market should play in the long run social and economic reproduction of capitalism: Adequate public regulation and fine tuning of monetary and fiscal policies could promote quasifull employment, along a steady growth path. Basically market mechanisms had to be tamed by a series of legislation, regulation, and collective agreements, as well as built-in stabilizers in the tax system and/or in the reaction functions of central banks. As Joan Robinson recurrently pointed out, markets were efficient for allocating scarce resources between alternative goals via the formation of relative prices. But one major drawback resulted from the fact that pure market mechanisms were generally unable to provide full employment and macroeconomic stability. In fact during the fifties and sixties this view was widely shared by almost all governments, including the most conservative ones. Did not Richard Nixon declare, “Now we are all Keynesians”?

Compared to the attention they have lavished on strategic voting in single- member simple plurality elections, scholars have neglected strategic voting in multimember districts. We do have the Leys-Sartori conjecture - the thesis that strategic voting will be politically significant, acting to reduce the number of competitors, under PR systems with low district magnitudes, high thresholds, or other features that militate against the success of small parties. But there is not much systematic empirical evidence to back this claim up. Indeed, neither Leys nor Sartori cite or adduce any evidence at all; their conjecture is based on their own insight and an informal appeal to logic.

In the opening chapter of this book, Hollingsworth and Boyer suggest that “we must be sensitive to how economic coordination is linked to all spatial-territorial areas – the level of regions within countries, the level of the nation-state, and levels beyond the nation-state.” The process of globalization discussed in this chapter creates a need for improved economic coordination at the transnational level, yet it is at that level that it is particularly poorly developed and difficult to achieve. The development of economic globalization has not been counterbalanced by the development of appropriate mechanisms of governance.

The 1980s have seen an accelerating process of economic globalization, but a relatively limited development of political structures that can regulate this process. Indeed, the best developed mechanisms of governance that exist at the supranational level are intra- and interfirm: coordination within the new “stateless firms” discussed in this paper, and between firms through such devices as joint ventures and cartels. The chief executives of stateless firms claim with some justification that their enterprises “change relations between companies. We function as a lubricant for worldwide economic integration” (Taylor, 1991: 105). However, firms are not well placed to act as agents of international governance, particularly if the insertion of public policy objectives in the decision-making process is thought to be desirable. International firms create the need for improved international governance, but they do not and cannot provide it.

The Cambridge series on the Political Economy of Institutions and Decisions is built around attempts to answer two central questions: How do institutions evolve in response to individual incentives, strategies, and choices, and how do institutions affect the performance of political and economic systems? The scope of the series is comparative and historical rather than international or specifically American, and the focus is positive rather than normative.

Gary Cox has written a superb, wide-ranging theoretical analysis of the consequences of electoral systems for the way governments are chosen by the mass of citizens. Rooted firmly in the “transaction benefits” theory of political institutions, which holds that a role of institutions is to prevent some collective choices from arising, or otherwise limit the number of enforceable policy outcome, Cox shows how a range of electoral institutions affect the extent and ease with which voters can coordinate (or form electoral coalitions) to provide outcomes or opportunities for transacting that improve on their status quo, but would not happen in the absence of these electoral institutions. In the coalitional equilibria he describes, voters make their votes count by controlling the number of candidates. But the emphasis everywhere is on synthesis, generalization, and unification of theory. Results apply to coalitions whether they are explicitly negotiated by elites or voluntarily coordinated by electors via strategic voting and convergent expectations about the strength of candidates.

PART 1: THE VOTER'S DECISION PROBLEM

This appendix considers how a voter motivated solely by a desire to affect the outcome of the election decides which candidate to vote for, given that she votes. There are two parameters in the voter's decision (subscript I'S are suppressed and the distribution of utility types F is taken as given): First, the voter's preferences over the candidates, given by u ∈ U; second, the voter's expectations about how well each candidate will do at the polls.

I model voter expectations as follows. Each voter i views the candidates' vote totals (exclusive of her own vote) as random variables V1, …, VK governed by a joint distribution function, gn (v1, …,vk). I assume that the mean of gn does not depend on n (the number of voters), although n may affect higher-order moments. It may be, for example, that gn is the K-nomial distribution with parameters π = (π1, …,πk) and n –1. This is the case considered by Palfrey (1989), Cox (1994), and in Chapter 4.

I assume that the joint distribution gn is common knowledge. This entails common knowledge of the expected vote shares of the candidates, denoted π = (π1, …,πk) = E(V1/ – 1), …,VK(n – 1)/ gn), and of the tie-probabilities relevant in the voter's expected utility calculation.