Insider Collusion as a Threat to Property Rights: Experimental Evidence from West Africa

We provide causal evidence on how a community’s formal institutions and social structure jointly affect the value of its land to outside investors. Using field research and a lab-in-thefield experiment in rural Benin, we show that potential urban investors perceive a higher risk of expropriatory collusion among villagers—and thus invest less—when villages lack formal land records and exhibit strong social tightness. We also find that, although formalizing land rights increases the confidence of outsiders, it does not eliminate their concerns about collusion: outsiders remain wary of investing in villages with a tight social structure even with formal property rights, indicating that local collusion continues to pose a barrier to developing impersonal property markets. Our findings therefore suggest that in addition to facilitating intra-community investment and trade (e.g., by formalizing land ownership), well-designed property institutions should also guarantee the impartial treatment of outsiders.