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 {\bf  Quarrelling and the Origin   of  Property     }  \\

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25 February 2008 \\

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Eric Rasmusen \\

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{\it Abstract}

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  A new explanation for not defining property rights is that it induces
outrage when people violate them.  This is different from the Demsetz
idea of the origin of property.

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\begin{small}

\noindent
  \hspace*{20pt} Dan R. and Catherine M. Dalton Professor, Department of
Business
Economics and Public Policy, Kelley School of
Business, Indiana University. visitor (07/08), Nuffield College, Oxford
University.  Office: 011-44-1865 554-163 or (01865) 554-163. Nuffield
College,
Room C3, New Road, Oxford, England, OX1 1NF.
Erasmuse@indiana.edu.   \url{http://www.rasmusen.org}. This paper:
 \url{http://www.rasmusen.org/papers/property-rasmusen.pdf}.

\noindent
Keywords:      Property.



\end{small}

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A big problem: In his model, Hart only uses one-sided uncertainty, and he uses a surplus-splitting reduced form in the second stage, both of which substantially simplify  the model. If I follow that, I'll just have his model exactly. 



 See Henry Smith's articles that I have on hand.
 

There's some durable goods in a village (or a family). Who should be
able to use them? Should the villagers divide up the uses contractually,
using their bargaining power?

Then, circumstances will change. Some people will be tempted to "steal".
That will cause ill feeling, and end cooperation.

 Or, property rights can be left vague. That can cause squabbling too,
when two people want to use a good at the same time.

Think of children and toys.

 Why are there property rights? So people can caputre the benefits of improvements. So they won't fight. 

 I argue for something simpler: coordination.  But that is very much like common pool problems. 

   What insights do I get? 
 1. You won't use all your bargaining power at the start. 

This idea  is really too close to Hart's paper. A contract is like the setting up of property rights. 

I don't have renegotation; I have taking. 


How is this different from the Demsetz theory in its implications? -- it says that property rights will arise when cooperation is important. 

 I am so dissatisfied with this idea that I should put it aside. The modelling has problems too. 

\bigskip


\noindent
{\bf The Model}

 One acre of land is available for the use of players 1 and 2.   The utility of land use is concave, and the marginal utility
reaches zero at some level. It also  depends on  uncertain parameters
$\tilde{N}_1$  and  $\tilde{N}_2$.

   If the players help each other farm, which they will do if
neither has ill feeling towards the other, then each gets amount $G$ in
utility.

 The order of play is as follows:


1. The players  may bargain to divide up the land by creating
property rights,   If they bargain  they
  choose  $X_1 =\theta$ and $X_2=   1-\theta$, but
otherwise property rights are not created. If they bargain, with
probability $\beta$  they create ill feeling.

2. Player 1 learns the value of  $\tilde{N}_1$  and Player  2 learns the value
of  $\tilde{N}_2$. Each is distributed independently according to the same density $f(\tilde{N})$ with support [0, 2]. 

3.  Each player decides how much land to try to use. They simultaneously
pick $\hat{C_1}$ and $\hat{C_2}$ from [0,1]. \\
 (a) If property
rights have been defined, then if $\hat{C_1}>X_1$ or  $\hat{C_2}>X_2$ ill feeling
results. \\
 (b) 
If  property rights have not been defined, then    ill feeling results with probability $q(\hat{C_1},\hat{C_2})>0$,  increasing in both arguments convexly. Thus, $q_1>0, q_2>0, q_{11}>0, q_{22}>0, q_{12}>0$. 

4.  Consumption levels are $C_1=\hat{C_1}$ and  $ C_2=\hat{C_2}.$\\
    (a) If there is no ill feeling  then $H=1$  and    the two players
help each other,    and  they add $G$ to each other's utility. \\
 (b) If there is  ill feeling    then $H=0$   and   the two players do not 
help each other. 

 The utility functions are:
\begin{equation}
  U( \tilde{N}_i C_i) + HG 
\end{equation}

The utility function is such that $U' \geq 0$, $U'' \leq 0$,  and $U'(z) =0$ for some  interval $[\overline{z}, \infty]$, where $\overline{z}>.5$ but less than 1, and $U'(z)>0$  on $[0, \overline{z}]$.

\bigskip


\noindent
{\bf Interpretation}

    In this setting, it may turn out  that land is a free good at the margin because both players are satiated. 

 It may also happen that the efficient outcome is for their combined consumption to exceed 1-- that is, they can both use the same land without conflict.  

Or, they may come into conflict even if they each only try to use a little of the land, if boundaries are not defined by property rights.

For example, they may both be hunting deer in the same forest, but as long as they are not in the same acre in the same hour, they do not disturb each others' hunting. 

Setting up property rights helps with coordination and avoiding disputes, but prevents the property from being as fully used as it would be otherwise. 

Also, setting up property rights can cause quarrelling in itself. 








\bigskip


\noindent
{\bf References}


Babcock, Linda, and George Loewenstein,   Samuel Issacharoff, and Colin
Camerer (1995), “Biased Judgments of
Fairness in Bargaining,” American Economic Review 85: 1337-43.

Demsetz, Harold, (1967), “Toward a Theory of Property Rights,” American
Economic
Review 57(2), 347-359.

Falk, Armin, Ernst Fehr,  and Christian Zehnder (2006), “Fairness
Perceptions and Reservation
Wages – the Behavioral Effects of Minimum Wage Laws,” Quarterly Journal
of Economics,
forthcoming.



Greenberg, Jerald (1990), “Employee Theft as a Reaction to Underpayment
Inequities: The
Hidden Costs of Pay Cuts,” Journal of Applied Psychology 75: 561-8.



Oliver Hart
HOLD-UP, ASSET OWNERSHIP, AND REFERENCE POINTS
Working Paper 13540
\url{http://www.nber.org/papers/w13540}
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
October 2007


Hart, Oliver, and John Moore  (2008), “Contracts as Reference Points,”
Quarterly Journal of Economics,
forthcoming.




Kahneman, Daniel, Jack L. Knetsch, and Richard Thaler (1986), “Fairness
as a Constraint on
Profit Seeking: Entitlements in the Market,” American Economic Review
76: 728-41.

Lord, Robert G., and Jeffrey A. Hohenfeld (1979), “Longitudinal Field
Assessment of Equity
Effects on the Performance of Major League Baseball Players,” Journal of
Applied Psychology,
64: 19-26.

McCloskey, Donald (1972), “The Enclosure of Open Fields: Preface to a
Study of
Its impact on the Efficiency of English Agriculture in the Eighteenth
Century,” The
Journal of Economic History 32(1), 15-35.


  BART TAUB RUI ZHAO (2008) ``Enclosure,'' {\it Economic Inquiry}.

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