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Property rights in sequential exchange

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Abstract

We analyze the “sequential exchange” problem in which traders have incomplete information on earlier contracts. We show that under sequential exchange, it is in general not possible to simultaneously implement two key features of markets – specialization between asset ownership and control, and impersonal trade. In particular, we show that in contrast with the conventional wisdom in economics, strong property rights—enforceable against subsequent buyers—may be detrimental to impersonal trade. Finally, we provide conditions under which a mechanism that overcomes the tradeoff between specialization and impersonal trade exists, and we characterize such mechanism. Our results provide an efficiency rationale for how property rights are enforced in business, company and real estate transactions, and for the ubiquitousness of “formalization” institutions that the literature has narrowly seen as entry barriers.

Suggested Citation

  • Benito Arruñada & Giorgio Zanarone & Nuno Garoupa, 2017. "Property rights in sequential exchange," Economics Working Papers 1588, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1588
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    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
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    Keywords

    Property rights; enforcement; contracts; incomplete information; impersonal exchange;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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