Endogenous Property Rights

Although property rights are key, their determinants are still poorly understood. When property is fully protected, some potential buyers with valuation higher than that of original owners are inefficiently excluded from trade due to transaction costs. When property rights are weak, low-valuation potential buyers inefficiently expropriate original owners. The trade-off between these two misallocations implies that the protection of property will be stronger the more heterogeneous the potential buyers' preferences are. This implication holds true when part of the population has higher political influence on institutional design, when transaction costs are determined by either market power or asymmetric information, and when I consider the disincentive effect of weak property rights. Moreover, it is consistent with the relationships between measures of ethno-linguistic, genetic, and religious diversity and novel data on the rules on adverse possession and on government takings of real property in 126 jurisdictions