Property rights, transaction costs and economic outcomes

A growing body of literature provides evidence that strong original owners’ property rights are associated with improved economic outcomes. However, recent research suggests that weaker property rights may represent an efficient societal response to high transaction costs. This paper examines the impact of property rights on economic performance, specifically income, unemployment, credit, and innovation, while accounting for transaction costs, their determinants, and other relevant controls. Using a panel of 136 countries from 2006 to 2019, I show that omitting transaction costs significantly overstates the effect of property rights. On average, roughly half of the positive coefficients attributed to property rights vanish once transaction costs are included. These results imply that property rights are not purely exogenous drivers of development but adapt to underlying market frictions. Stronger property protections do not always lead to better outcomes when transaction costs remain high. This suggests that reforms aimed at strengthening property rights should be coupled with efforts to reduce transaction costs, such as improving market transparency or regulatory efficiency. The findings offer new empirical support for the theory of endogenous property rights and highlight the importance of legal adaptability in institutional design. These findings are robust across multiple identification strategies.