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Owning versus Renting: Do Courts Matter?

  • Pablo Casas-Arce
  • Albert Saiz

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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File URL: http://dx.doi.org/10.1086/649962
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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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  1. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  2. Michiel van Leuvensteijn & Pierre Koning, 2006. "The Effect of Home-Ownership on Labour Mobility in the Netherlands," Chapters, in: Labour Market Adjustments in Europe, chapter 6 Edward Elgar Publishing.
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  8. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-occupied housing as a hedge against rent risk," Working Papers 05-10, Federal Reserve Bank of Philadelphia.
  9. World Bank, 2004. "World Development Indicators 2004," World Bank Publications, The World Bank, number 13890, October.
  10. Gyourko, Joseph & Linneman, Peter, 1996. "Analysis of the Changing Influences on Traditional Households' Ownership Patterns," Journal of Urban Economics, Elsevier, vol. 39(3), pages 318-341, May.
  11. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  12. Etienne Wasmer, 2005. "Housing market discrimination, housing regulations and intermediaries," Sciences Po publications info:hdl:2441/9023, Sciences Po.
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