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Owning versus Renting: Do Courts Matter?

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  • Pablo Casas-Arce
  • Albert Saiz

Abstract

We develop a legal contract enforcement theory of the decision to own or lease. The allocation of ownership rights will minimize enforcement costs when the legal system is inefficient. In particular, when legal enforcement of contracts is costly, there will be a shift from arrangements that rely on such enforcement (such as a rental agreement) toward other forms that do not (such as direct ownership). We then test this prediction and show that costly enforcement of rental contracts hampers the development of the rental housing market in a cross section of countries. We argue that this association is not the result of reverse causation from a developed rental market to more investor protective enforcement and is not driven by alternative institutional channels. The results provide supportive evidence for the importance of legal contract enforcement for market development and the optimal allocation of property rights. (c) 2010 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 53 (2010)
Issue (Month): 1 (02)
Pages: 137-165

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Handle: RePEc:ucp:jlawec:v:53:y:2010:i:1:p:137-165

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Lichand, Guilherme & Soares, Rodrigo R., 2011. "Access to Justice and Entrepreneurship: Evidence from Brazil's Special Civil Tribunals," IZA Discussion Papers 5917, Institute for the Study of Labor (IZA).
  2. Eva Ortega & Margarita Rubio & Carlos Thomas, 2011. "House purchase versus rental in Spain," Banco de Espa�a Working Papers 1108, Banco de Espa�a.

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