Property Rights and the Rule of Law

Coen Teulings and Martijn Huysmans ()
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Coen Teulings: Utrecht University
Martijn Huysmans: Utrecht University

Chapter 9 in The Microeconomics of Market Failures and Institutions, 2025, pp 235-255 from Springer

Abstract: Abstract Property rights serve as a commitment device, protecting investors against the holdup problem of ex-post intervention of other players to extract the surpluses created by the owner’s prior investment. This also regards public intervention by political authorities on behalf of their voters. Markets generally assign property rights efficiently. However, politics retains the ultimate authority to override these property rights, when unexpected externalities require it. This raises two questions: (i) when does the externality weigh sufficiently to do so, and (ii) when should the owner be compensated for this intervention? Compensation is justified if the intervention (i) is unexpected or inefficient, (ii) affects a small and highly risk-averse group, (iii) private insurance is unavailable, and (iv) the government has a valuable reputation for non-intervention. Whether or not compensation is due, is judged not by politics itself, but by the judiciary power, thereby balancing the force of power embedded in politics and the force of reason embedded in the judiciary.

Date: 2025
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DOI: 10.1007/978-3-031-74987-2_9

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