Property Rights

Property rights are the legally or socially recognized entitlements to use, exclude others from, and transfer a resource, and their assignment and enforcement is a central subject of New Institutional Economics. Ronald Coase's 1960 essay The Problem of Social Cost showed that when parties can bargain freely and transaction costs are negligible, the initial assignment of a property right does not affect which use of a resource is efficient, only who bears the cost of achieving it, a result known as the Coase theorem; because real transaction costs are rarely negligible, Coase treated the careful assignment and enforcement of property rights, rather than their assignment being irrelevant, as the practical lesson of the argument. Douglass North extended the analysis to economic development more broadly, arguing that whether a society's institutions make property rights and contracts credible and secure determines whether individuals expect the gains from productive investment to be protected, and therefore whether productive investment happens at all.