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Transforming Post-Communist Political Economies
protection and private capture, see Hirshleifer, 1995, and Grossman and Kim, 1995.)
Private property rights create incentives to produce wealth by internalizing the benefits and costs of the owner's actions with the owner. Private ownership means that an owner can control the use of an asset and exclude others from using it, that one has the right to enjoy benefit or income and the right to transfer. Ownership also implies the responsibility to bear the costs of one's actions. Gaining these rights of ownership, individuals have incentives to create and maintain productive assets.
When property rights to valuable income streams are not defined and enforced, individuals have an incentive to spend real resources to capture such rights. Such a competition will tend to dissipate (or, with uncertainty, more than dissipate) the value of ownership. If the private protection of property is costly, individual incentives to produce and maintain resources will be reduced. Further, some of the resources available for productive use will be diverted to attempts to capture wealth or prevent such capture.
Property rights not only define the individual's rights to capital, but also define people's rights to their own skills and abilities. That is, liberty implies the right to direct oneself and to own the fruits of one's effort. The link between property rights and civil rights is demonstrated in the case of China. In prereform China, political authorities held the right to direct individuals to a place of work and to define the conditions of their employment. These control rights over labor were enforced by a rationing system that gave individuals access to rations of basic commodities at their place of employment. But as soon as agricultural reforms created a free market in food, it became much easier for workers to move from place to place in search of better work opportunities, giving them greater de facto property rights over their own human capital. As is true of all institutions, it is de facto and not de jure property rights that will determine people's incentives to act and will shape the organizations they establish.
The Supply and Demand for Institutional Change
Private owners who receive the gains from moving resources to higher-value uses will have incentives to create institutional arrangements supporting such transactions. Thus, resource owners have incentives to create market institutions that define and enforce property rights at lower cost.
Moreover, differences in initial endowments and tastes for risk and incentives to enjoy specialization and economies of scale will lead individuals to establish institutional arrangements that allow them to partition property rights in a variety of different ways. If the institutional framework allows, an owner may choose to farm her land herself or to hire a tenant. She may lease her fields to the tenant in exchange for a fixed payment, leaving him free to select