Measuring property rights institutions

Simeon Djankov, Edward Glaeser, Andrei Shleifer 25 September 2020

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In a modern society, the protection of property rights – including both possession and transfer – is typically delivered not only by courts and police, but also by administrative institutions such as deed registration offices. Empirically, much attention has been devoted to the effectiveness of courts and regulators in protecting private property, including in cross-country contexts (e.g. La Porta et al. 2004, Behrer et al. 2020). Less is known about the role of administrative institutions that keep track of ownership and its transfer.   

Title is the central legal instrument that both secures possession and enables the transfer of property. Documenting formal title is usually a prerequisite for using legal authority to protect one’s land and dwellings, and that is done through administrative tools such as cadastres and deeds. Without formal title, residents must rely on self-protection to assure unhindered enjoyment of their residence and land (Field 2007) and have limited incentives to invest in such informally owned property (De Soto 1989, Besley 1995). Only secure title can, in principle, provide protection against expropriation by armed bandits, powerful neighbours, and the grabbing hand of the state (Olson 1993, Shleifer and Vishny 1998).     

The institutions that track and enable the transfer of title ensure the legal recognition and sanction of the permanent transfer of property ownership. In many of the word’s informal urban communities, residents are relatively safe from expropriation and eviction, but without legal sale they lack the means to trade their property for cash, move closer to work, or borrow money through a mortgage (De Soto 2000). Even with title, the cost in time and money of a legal sale may stymie mobility and leave residents rooted in place. That stasis may explain the long commutes between informal communities and formal work in many developing world cities, such as Kigali (Collier and Venables 2014).

Our research

In a new paper (Djankov et al 2020), we investigate the distinction between the right of possession and the right of transfer, and the distinctive effects that the institutions protecting these rights have on urban development. To this end, we analyse a large cross-country dataset assembled by the World Bank over the last 16 years. The dataset contains information on institutions securing property title, as well as the institutions governing the transfer of ownership, for 190 countries. 

We accomplish three goals. First, we describe the relevant datasets, and show how property rights institutions covering both the titling of property and its transfer can be objectively measured. Second, we present new evidence that these institutions have a substantial impact on economic outcomes, especially in the context of the allocation of urban land. Third, we present some evidence that the institutions show dramatic improvement over the 16 years of the data. 

We also establish three preliminary findings. First, there is tremendous disparity in the quality of institutions of titling and transferring property across countries, but they are generally much better in more developed (or higher human capital) countries. The finding is not surprising, since the human capital of a country and its level of economic development are typically closely associated with all measures of government effectiveness. Second, perhaps more surprisingly, although the data on titling and transfer institutions are collected in very different ways, there is a high correlation between the quality of the two types of institutions, even controlling for the level of economic development. And third, several of the determinants of the quality of institutions identified in previous research, such as human capital, the level of development, and government effectiveness, matter here as well, while others, such as legal origin, do not. 

We next test whether weak transfer rights are associated with more traffic congestion in cities and find that is the case as well. Housing always has two critical qualities: location and physical structure. Our model predicts that right of possession is associated with better structure and that right of transfer is associated with better location. Both predictions find support in the data.   

Finally, we examine the prevalence of home-related lending across countries, which should be influenced by both title and transfer institutions (Badev et. al 2014). A mortgage loan relies both on a valid title, and on the ability to repossess and sell (transfer) the property if the borrower defaults. While both title and transfer measures correlate with the prevalence of mortgages, the number of transfer procedures influences the penetration of housing loans, even controlling for both title and the per capita income. This result shows the key role of the right of transfer for financial development.

Improvements over time

We describe the evolution of institutions governing property transfer over the relatively short period of our sample. We have the transfer variables over 16 years, but we only have the title variables for a few years. For many institutions, particularly those tied to legal traditions of countries, the data show a great deal of persistence (La Porta et al. 2008), but here we find something different. Over a 16-year period, many countries sharply improved their institutions for transferring property. The timeframe is too short to allow us to test whether these institutional changes translate to reduced commute lengths, or other improvements in urban form.   

The mechanisms behind the improvement largely result from the pervasive introduction of information technology. We found little evidence that suggested that these changes were politically motivated, but rather that they were efficiency driven. As cities grow, it becomes increasingly efficient to invest in better procedures for formalising the transfer of property. Many cities have accommodated that demand. As Demsetz (1967) argued over half a century ago, the creation and improvement of property rights institutions follows, at least in part, the needs of economic efficiency.

References

Badev, A, T Beck, L Vado and S Walley (2014), “Housing Finance Across Countries: New Data and Analysis”, World Bank Policy Research Working Paper No. 6756.

Behrer, P, E Glaeser, G Ponzetto and A Shleifer (2020), “Security property rights”, Journal of Political Economy, forthcoming. 

Besley, T (1995), “Property Rights and Investment Incentives: Theory and Evidence from Ghana”, Journal of Political Economy 103(5): 903‒937.

Chong, A, R La Porta, F Lopez-de-Silanes and A Shleifer (2014), “Letter Grading Government Efficiency”, Journal of the European Economic Association 12(2): 277-299.

Collier, P and A Venables (2014), “Closing Coal: Economic and Moral Incentives”, Oxford Review of Economic Policy 30(3): 492-512.

Demsetz, H (1967), “Towards a Theory of Property Rights”, American Economic Review 57: 347-59.

De Soto, H (1989), The Other Path: The Invisible Revolution in the Third World, Harper and Row.

De Soto, H (2000), The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Basic Books.

Djankov, S, E Glaeser, V Perotti, and A Shleifer (2020), “Measuring Property Rights Institutions”, LSE Financial Markets Group Discussion Paper 813, September.

Field, E (2007), “Entitled to Work: Urban Tenure Security and the Labor Supply in Peru”, Quarterly Journal of Economics 122(4): 1561–1602.

La Porta, R, F López‐de‐Silanes, C Pop‐Eleches, and A Shleifer (2004), “Judicial Checks and Balances”, Journal of Political Economy 112(2): 445-470.

La Porta, R, F Lopez-de-Silanes and A Shleifer (2008), “The Economic Consequences of Legal Origins”, Journal of Economic Literature 46(2): 285-332.

Olson, M (1993), “Dictatorship, Democracy, and Development”, American Political Science Review 87(3): 567-76.

Shleifer, A and R Vishny (1998), The Grabbing Hand, Harvard University Press.

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Topics:  Development

Tags:  property rights, formal title, transfer of title

Policy Director, Financial Markets Group, London School of Economics

Fred and Eleanor Glimp Professor of Economics, Harvard University

John L. Loeb Professor of Economics, Harvard University

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