Property as Sequential Exchange: The Forgotten Limits of Private Contract

The contractual, single-exchange framework in Coase (1960) contains the implicit assumption that exchange in property rights does not affect future transaction (i.e., trading) costs. This is pertinent for analyzing use externalities but limits our understanding of property institutions: a central problem of property markets lies in the interaction among multiple transactions, which causes exchange-related and non-contractible externalities. By retaining a single-exchange simplification, the economic analysis of property has encouraged views that: (1) overemphasize the initial allocation of property rights, while some form of recurrent allocation is often needed; (2) pay scant attention to legal rights, although these determine enforceability and, therefore, economic value; and (3) overestimate the power of unregulated private ordering, despite its inability to protect third parties. These three biases have been misleading policy in many areas, including land titling and business firm formalization.