Friday, March 8, 2013

Property Rights and Incentives

            A constant theme in this blog has been that the key to successful economic policy is “getting the incentives right.”  One element of making incentives work is establishing that property rights are secure and well defined.  An obvious, but often overlooked, fact is that the incentive to produce requires property rights to the fruits of one's labor.  Without a legal system which fairly enforces property rights, the incentive to produce is greatly diluted by the incentive to become a “political lobbyist.”

           Recent work by Hernandode Soto demonstrates the importance of the interplay between incentives and property rights in the context of the Arab Spring uprisings.  Mr. de Soto notes that in Egypt, for example, 82% of the businesses and 92% of the land holdings are unrecorded and thus unprotected by the rule of law.  Such failure to secure property rights plays havoc with incentives.  Without objective and fair legal protection, the only way to safeguard the value of a business is by courting government officials, hiding from government officials, or attempting to overthrow government officials.  Unfortunately, none of the above makes for a productive economy or a stable society.

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