Property Rights in Sequential Exchange

Benito Arruñada, Giorgio Zanarone and Nuno Garoupa

The Journal of Law, Economics, and Organization, 2019, vol. 35, issue 1, 127-153

Abstract: We analyze the “sequential exchange” problem in which traders have imperfect 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 because they expose asset buyers to the risk of collusive relationships between owners and sellers. Finally, we provide conditions under which a mechanism that overcomes the trade-off between specialization and impersonal trade exists. We characterize and discuss 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.

JEL-codes: D23 D83 K11 K22 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Property Rights in Sequential Exchange (2017)
Working Paper: Property rights in sequential exchange (2017)
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