From all of us at TPS...

Happy Thanksgiving!

Property Rights in India

My close friend and colleague Shruti Rajagopalan has an article at the WSJ on the Allahabad High Court's recent decision concerning the Babri Mosque. Here's an excerpt:

With such a precedent, state legislatures are too feeble to prevent similar disputes in other religious sites where Hindus and Muslims pray together, such as Mathura and Varanasi. In a land of 820 million Hindus who worship several hundred forms of God, the danger of expropriation in the name of faith is real and imminent.

ATSRTWT.

Property Rights for the Poor: Effects of Land Titling

By Sebastian Galiani and Ernesto Schargrodsky, forthcoming in JPE (ungated):

Secure property rights are considered a key determinant of economic development. The evaluation of the causal effects of property rights, however, is a difficult task as their allocation is typically endogenous. To overcome this identification problem, we exploit a natural experiment in the allocation of land titles. In 1981, squatters occupied a piece of land in a poor suburban area of Buenos Aires. In 1984, a law was passed expropriating the former owners’ land to entitle the occupants. Some original owners accepted the government compensation, while others disputed the compensation payment in the slow Argentine courts. These different decisions by the former owners generated an exogenous allocation of property rights across squatters. Using data from two surveys performed in 2003 and 2007, we find that entitled families substantially increased housing investment, reduced household size, and enhanced the education of their children relative to the control group. These effects, however, did not take place through improvements in access to credit. Our results suggest that land titling can be an important tool for poverty reduction, albeit not through the shortcut of credit access, but through the slow channel of increased physical and human capital investment, which should help to reduce poverty in the future generations.

Want to Trade Your Water? Here's How It's Done In California!

Just follow the water decision tree!!
Can be found as Figure 1 here. Click to enlarge.

The Private Provision of Public Goods: The Bones of Santa Claus

From Time:

In 1087, the Italian town of Bari hired men — some accounts call them pirates while others refer to them as "privileged mariners" — to steal St. Nicholas from Myra, a town in present-day Turkey. The theft of Santa's bones is still celebrated in Bari with an annual parade and fireworks.

According to this website, this project was launched as a joint venture organized by private merchants and a Bari church. It also says that the church double crossed the pirates and never paid them. They overcame the free-rider problem nonetheless.

Zoning: Regulation, Community Property Right, or Both?

Frank Stephenson at D.O.L. remarks on Levine's Zoned Out:

I do have one quibble--the author can't quite make up his mind what we economists think of zoning:

p. 80: "[T]he very meaning of zoning as a collective property right--a view now broadly adopted by the economics profession ..."

p. 87: "Economists and other social scientists have split on the nature of zoning--with some viewing it as governmental regulation and others viewing it as more akin to a 'collective property right.'"

I have not read the book in question, but I actually would agree that the economics profession is of two minds about zoning: one as regulation and one as a collective property right (CPR). I think your modal economist would see it as regulation, but your modal economist researching and publishing on local public finance or governance structures are more likely to view it as a CPR. Richard Epstein would be an obvious candidate for disagreement.

I'm going to provide some explanation of the CPR view.

On paper, zoning is indeed regulation, having very specific prescriptions with ambiguous intentions. In function, what they are trying to do is protect home owners from negative externalities, both pecuniary and technological. Since all technological externalities (noise, traffic, etc) are capitalized into housing prices in the same way as if a bunch of new housing were constructed in the area, home owners and zoning officials have little reason to differentiate between them.

At the same time, it is extremely difficult to get around the fact that externalities are a big deal, and any nuisance is not just annoying, it is costly. Furthermore, in a world without zoning, new housing can be constructed quickly if demand is expected to rise. If demand falls construction will stop, but the housing stock is not likely to change a great deal (in part because of demolition costs). This makes externality-sensitive housing a rather asymmetric risk. If demand rises in your area, housing will only appreciate at the marginal cost of construction, but if demand falls your price falls steeply.

Furthermore, your neighbors have a pretty good incentive to ignore externalities when they sell their homes. If your neighbor sells their home to someone who wants to renovate the property into a noisy bar, he doesn't have much incentive to consider how this might impact his ex-neighbors. Note that, although the noise is a technological externality, it will have a negative pecuniary effect on the neighboring homes.

Enter the role of zoning. The CPR view begins by thinking of a given municipality as a supplier of institutions and property. The institutions are going to consist of a mix of taxes, public goods, and mechanisms for handling externalities (i.e. zoning). Developers or other commercial producers are on the demand side of this market. They are likely to bring benefits (tax revenue, local demand for property, etc) to an area, as well as new pecuniary and non-pecuniary externalities (congestion, pollution, new supply of alternative residences, etc).

Zoning serves as an exclusionary purpose (like a property right) to these entities, but remains open to change pending some negotiation. In fact, zoning is probably the most malleable legal institution in the United States. While the stated objective of zoning commissions is often ambiguous, in practice they serve the purpose of evaluating demanders of institutions/property to verify that their expected benefits outweigh their costs, which will be signaled through their expected consequence on existing property values.

I don't mean to say zoning is all roses and fine wine, the critics of zoning have good points. Zoning commissions make both type I and type II errors, inflate housing prices, can get captured, engage in regulatory taking, etc. Any industry with more than 30,000 firms would likely have more than a few bad apples.

I think the community property rights view is quite correct in the positive analysis of zoning, but the open question is the normative implication. As of now, I lean towards a more Ostromesque view that zoning is a way that local communities have evolved to deal with externalities, and I would be very hesitant to impose some kind of reform that stripped them of this mechanism.

How is that Pfizer Deal Working out, New London?

The City of New London (CT) and the U.S. Supreme Court stole Susan Kelo's home, and the Tax Foundation blog has a great post providing us with an update:

The Court accepted the argument of the City of New London, Connecticut, that transferring the property from the current homeowners to private developers would increase the number of jobs in New London and increase the tax revenues available to the city. This, in the Court's mind, was enough to satisfy the "Public Use" requirement of the Takings Clause.

[...]

Well, how much tax revenue is it generating now? Zero. The developers have changed their minds and have no plan to develop the land, as Business Insider explains, alongside a picture of the vacant lot where only feral cats now live.

I recommend the whole post, which also mentions that Justice Souter, who cast the decisive vote for the majority, became the target of a Kelo-style eminent domain attempted seizure for something called the "Lost Liberty Hotel."

Praise for Bauer

I just wanted to draw your attention to my post and the discussion over at AidWatch on the importance of Bauer in development economics, especially on the role of foreign aid.

+/-

.

Externalities: Body Odor Edition

From the AP (dated 9/2/2009):

HONOLULU - A vote on a Honolulu City Council proposal that would bar people with offensive odors from public transit vehicles is being delayed.

The proposed ordinance would make it illegal to have "odors that unreasonably disturb others or interfere with their use of the transit system."

Councilman Nestor Garcia said Wednesday the proposal has some technical problems that need to be addressed.

Granted, Coasian bargaining probably doesn't work here. I assume they mean city-owned when they say "public transit," so there is a legitimate concern of granting the property right to the party that values it the most. In this case, some people value being stinky while others value the absence of stink on people.

I think it is interesting what people will have to admit to themselves in order to support or oppose this ordinance. Body odor is something of a random variable that is only partially determined by personal hygiene. Also random is the manner in which this must be enforced. If we think of body odor as a continuous spectrum, one must identify where they think the cut-off will be as well as where they are on the spectrum. Can they get the city to credibly commit to a point on the spectrum, even in tough financial times?

Update: Rachel Herz points out a similar ban has been in place in Novia Scotia for a few years:

The city of Halifax in Nova Scotia imposed a ban on scent in 2000, specifically artificial scent, which resulted in elderly ladies being kicked off buses for wearing perfume and high school students being accused of "assault" for sporting hair gel and Aqua Velva in class. I have not found confirmation that anyone has ever been jailed or fined for these Canadian scent offenses.

Herz goes on to point out, legitimately in my view, that the psychology of smell coupled with these laws could create class and race issues.

Private and Competitive Regulation of Medicine

The idea is laid out by Ronen Avraham in The Economists' Voice

A market of guidelines produced by private firms could create a gold standard for patient care. The firms would compete to sell their guidelines to doctors and hospitals and in turn offer their clients a safe harbor from medical malpractice lawsuits, provided that the guidelines are followed. The private firms, unlike current organizations that create guidelines, would be held liable for promulgating sub-optimal guidelines. They would strive not only to reduce costs in order to sell their guidelines, but also to maximize patient safety to avoid liability. The private firms would have a strong interest in continually funding objective scientific research to create evidence-based medicine in order to achieve their twin goals of cost savings and patient safety. Granting immunity to doctors who follow such guidelines would go a long way toward meeting the nation’s goals of minimizing healthcare costs while maximizing patient safety.

It is a meaty 5 pages, so have your coffee before reading.

Save this Image For Your Lectures

For my fellow econ educators, by way of the CGD (Hat Tip: Art Carden), Zimbabwe (2000):

Negative Externalities Example

For the classroom, a negative consumption externality:

Hat Tip: Kyle Conover

Rule of Law in Indian Country

This article on the need for property rights and rule of law by Terry Anderson headlines at PERC:

Mr. Obama can also strengthen the rule of law in Indian country. Some reservations were placed under state jurisdiction in 1953: They have a stronger legal system than those with tribal jurisdiction, and they benefit economically. My own research, published in the Journal of Law and Economics, shows that for tribes with state jurisdiction, per capita income grew 20% faster between 1969 and 1999 than for their counterparts under tribal court jurisdiction. All Indians are less likely than whites to get home loans, but the likelihood of a loan rejection falls by 50% on reservations under state jurisdiction.

However, Jason Oberle of the American Indian Policy Blog generally disagrees with this implementation of property rights, he writes (in an e-mail exchange printed with his permission):

Mr. Anderson proposes that Tribes have their sovereignty sacrificed in order to gain economic development via the rule of law. Although, I agree with much of his discussion on the essential need of the "Rule of Law" I disagree with any notion of relegating or delegating or moving any authority from Tribes to place them in the hands of States. This will be counter productive for Tribes long-term. States have worked to slowly remove power from Tribes by slowly lobbying congress for additional legislation that allows them to regulate Tribal activities.

An excellent example of this is the Indian Gaming Regulatory Act, which requires Tribes to negotiate Gaming compacts with states. Primarily this is an economic issue, States wanted revenues from Tribes Casino operations, and collectively they lobbied Congress to make provisions for such revenue streams and it was placed into the Language of this Act. The act is available here if you are interested in reading the law.

Many of the leaders of Indian Country today are old enough to remember the end of the last attempt of the Federal Government to terminate the Indian people. This was a Federal policy which began in the 1940's and ended about 1962. It was 20 years of very bad times for Indians. During this period, the Federal Government discontinued most or all of its support for Indians, including legal, health and human services, and most importantly refused to honor its contractual obligations (Treaty Rights) with Tribes and Indians.

Considering the aforementioned issues, only briefly, it is difficult for many people full understand Indian people and Indian Country. I argue that it is essential to include Indian Country and Indian Country scholars in federal studies of Indian country because of these and similar cultural issues.

What I would propose as a solution to the "Rule of Law" issues is increased Tribal Sovereignty. Increased sovereignty provides with some critical opportunities to improve issues of "Rule of Law." For example, Midwest and Eastern Tribes which have increased Tribal Revenues by way of casino operations have actually increased their sovereignty on a practical level because many members of Congress, as well as many firms, do not attempt to circumvent or short circuit Tribal Sovereignty out of credible legal concerns.

Some tribes have also identified the rule of law issue and in some case negotiate contracts with a waiver of sovereign immunity and directly identify in the contract the legal jurisdiction which shall be used to settle legal or lawful disputes. Often in contracts I am aware of the state or federal courts are selected to handle these disputes.

In regards to Anderson's comments about "property rights" he indeed is correct about the 'tragedy of the commons' which occurs on some reservations. I have observed where some tribes have addressed this issue by long-term contracts with members. For example, as a member of the Sault Ste. Marie Tribe of Chippewa Indians, I have the ability to negotiate a long-term (99 year) contract with my tribe for the exlusive use of land held in trust by the US government. In many cases this opportunity has given the lease holder adequate incentive to protect the property value or likewise eliminate the risks associated with the 'tragedy of the commons.' Obviously, this is not perfect, but realistically there is not a real difference other than a simple fee land because it establishes ownership for a term which exceeds the households physical lifetime.

Curiously, I am wondering why Mr. Anderson would propose the limiting of sovereignty for Indian tribes and further suggest that simple fee land is the optimal outcome for Tribal lands. His same article points out the fact that Tribes have excelled at control of Tribal lands and exceed the useful production of the U.S. federal government i.e. Anderson's forestry example. It seems to me that this is an argument for less government interference with tribes. Allow tribes to manage Indian land, allow tribes to expand sovereignty, allow tribes to control mineral rights, and allow tribes to negotiate its own contracts with firms and individuals. Not simply to remove legal authority and pass it to the states.

Interesting thoughts from both Oberle and Anderson. It is clearly a complex issue, and it seems that development economists might have a lot to learn about the nature of property rights by studying Indian Country.

Coase nonsense

Freakonomics has another post on the Coase theorem and its apparent failure to describe a real-world outcome. This time it's that liquor store right off the Strip in Vegas amongst the towering hotel-casinos. This isn't the first time they've gone down this path; there's a link in their post of more anti-Coase examples.

Can someone clarify for me why it is that an opportunity for increased profits due to a transfer of property rights is a failure of the Coase Theorem? Of the fundamental lessons from Micro principles is that value is subjective; it's easiest to describe examples of the Coase Theorem using simple dollar figures, but that's not the whole story. It can't be conceivable that the owner of the liquor company would value sticking it to the property owner over accepting a check from him? I don't get it.

The irony that the main economist on the site, Steve Levitt, is at the University of Chicago isn't lost on me either.

The Inauguration's "Prostitution Free Zone"

WUSA9 reports:

WASHINGTON, DC (WUSA) -- District police have placed signs along 5th and I Streets. They read, "Warning, Prostitution Free Zone." Those who disobey could be fined 300 dollars, and even jailed.

This is interesting because in the distinction between law and legislation, prostitution seems to remain in some sort of gray area between the two. The legislation reads that is illegal (except in Rhode Island and Nevada) but the law is clearly something else. After all, CNN is able to report on a national auction for a San Diego woman's virginity without any her demonstrating any apparent legal concern.

If the law truly were against prostitution in D.C. there would be no reason for the sign indicating a "Prostitution free zone." That is not the case, outside the zone the law is something else. Prostitution is illegal but not necessarily against the law.

My personal belief is that this is a part of an enforcement strategy for other laws, that the legislation serves as a credible threat. A police officer can solicit information about the criminal world (one in which the women are forced into by the legislation) because they have the legislation behind them. Of course this also allows police to solicit other services as well. James Bovard at FEE has claimed that the D.C. police occasionally use this law to seize cars from potential Johns.

Whatever prostitution legislation is about, I do not believe it is about the sex between consenting adults.

Very Good Sentences On Secure Property Rights

KipEsquire conveys the importance of private property rights in lieu of regulations in a very fine way:

If I go out and murder someone, does that suggest that the penal code “failed” or that the police “failed”? If I go out and rob a bank, does that mean that the Federal Reserve “failed” or that the FDIC “failed”? Of course not.

All the government can do is establish consequences for malfeasance, then make sure I know the consequences of that malfeasance. If I accept those consequences and commit the crime anyway, then what more is the state supposed to do exactly, except assign a prosecutor and impanel a jury?

It cannot possibly be the responsibility of regulatory bureaucracies such as the SEC to prevent criminal conduct a priori. The government can only provide the framework to help people avoid being victims, and to punish malefactors afterwards.

The entire post is worth the read.

Breastfeeding and Facebook

While I seem to be one of the ever fewer that (proudly) resists Facebook, there seems to be a bit of a hubbub over at the social network site recently-- namely, their removal of some members' breastfeeding pictures from the site.

Sadly, the argument usually goes one of two ways. If you're in favor of allowing the pictures to be shown, it's a "Hey! It's not obscene!" argument. If you're not, it's "Why would they want those up there anyway" argument. Nothing like hearing those that can't argue get angry at those who are equally deficient.

This is so cut and dry it's infuriating. Should people have the right to show pictures of themselves breastfeeding if they so choose? Absolutely. Is Facebook obligated to provide this forum for them? Absolutely not. If they want to pull the pictures, then by all means they should. No one is preventing said mothers from securing their own domains for their pictures and further, should there be a collective demand for an arena of breastfeeding photography, the market process will send Facebook to its watery grave.

Quick hits

- Good idea: Reduce transactions costs for your potential employer.

- Better idea: Privatize sharks.

- Sark holds its first election to fill a democratic government in 450 years. Think constitutional reform is an 18th century topic? Not so. Here is the Wikipedia entry for Sark, "last European territory to abolish what some called classic feudalism in 2008"; note that the population is about 600, meaning that turning out "in their hundreds" could lead to a voter participation rate of...yup, 50%. I'd be curious to see the actual numbers when they come in, though-- since it's an event, you'd expect higher. Even more interesting-- 57 candidates ran, meaning that about 10% of the population was on the ballot. For the United States, that would equate to thirty million people running for office. Is it possible that everyone knows at least one person running, and would thus want to support them at the polls? Could be. Perhaps most interesting-- 28 seats are available, meaning about 5% of the population will hold public office. If the population of 600 is split over 28 seats, then all of the sudden the probabilty of being deciding vote rises considerably.

Public choice observations in the circumstance of (very) small numbers? I'm intrigued.

Punishment and Common Pools

TPS zoologist Bryce Ryan sends along this bit, it's from Science but has quite a bit of economics in it.

My thoughts:

- One thing that's missing is that cooperation is an expected outcome if the discount rate and difference in payoffs are structured properly. Punishment need not play a role. Repeated games + Realization that cooperation can help you = Cooperation, even in a selfish world. That's the folk theorem, basically, and it answers the question as to why games that look like typical prisoner's dilemmas don't cause the problems you'd expect. It's a function of repeated dealings.

- They test between the punishment and non-punishment groups and find more long-term income for the punishment groups...well, as a public choice guy, tell me about the collective action aspect of punishing the group?! They are groups of three...could you just buddy up with one other person in the group and blindly punish the third member for no reason? Also, realize that the structure of the punishment is such that the personal choice is "give to the common good or have it confiscated." Sure sounds Lenin-esque, huh? Not sure that approximates the choice for individuals in this society, but that's always the default criticism for experimental work. Also, one big problem with common pool problems are not that there's shirking (of course, that's a problem) but that it's oftentimes tough to tell who's shirking. If there's a can to chip in money for the local park-- how can you tell who put money in? Yes, it can be overcome, but it's still a problem-- it's not like common pool problems can't be overcome either, so it's valid to consider.

- By the way, this is a very common experiment to show the detrimental effects of poorly defined property rights.

Self Regulation in Port Lincoln

Incentives matter:

One secret of Port Lincoln's success has been a remarkable system of self-regulation. Take the rock lobster industry, which exports shellfish the size of poodles to grateful consumers in China, Hong Kong and Taiwan. Since 1991, the lobster fishermen have voluntarily reduced the length of their season, the number of pots that they can lay and the minimum size of lobster ­ or crayfish, as they are called here ­ that they can catch.
...
Steaming out to sea to pull his pots on a cool, clear autumn morning, Mr Collinson reflects on a wise investment that he made as a 23-year-old deckhand in 1983. He bought a licence and 40 crayfish pots, which cost him $40,000 (about £16,000 at today's exchange rates). He now has the maximum 60 pots, and his licence is worth $2.2m (about £840,000).
...
The value of licences spiralled as cray fishermen not only found new markets in Asia, but also recognised that it was in their own interests to look after the stocks. For without a healthy fishery, their licences would be worthless. The fishermen have become conservationists; they work in close co-operation with government scientists and, if the scientists advise them they are overfishing, they take steps to catch less. Every aspect of their job is regulated, mainly at their own instigation; boat size, engine power, dimensions of pots.