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How are property rights linked to economic activity?
Property as an Incentive
The ability to possess property for one’s benefit and to exclude others is understood as a desire or want of many individuals. Research has shown that individuals will expend effort to acquire resources that meet a need or want. Providing a system whereby individuals may acquire property incentivizes those individuals to work toward that end. That is, people will expend effort to acquire property if they have the knowledge that they will be able to retain the property for their personal use and without the threat of forfeiting the property to others. They will undertake work that they were not otherwise willing to undertake in the absence of acquiring new property. Some individuals are willing to work longer and harder incentivized by the amount of property they are able to acquire as a result of their efforts. This tendency often results in greater efficiency in effort and overall economic productivity. Increased productivity of individuals is linked to increases in total economic output in an economy.
Discussion: Do you believe that ownership rights in property have a positive or negative effect on individual productivity? Why or why not? If yes, are there any negative effects of the incentives created by property rights? Are there any disincentives associated with property rights?
Practice Question: Jonathan works in a 9 to 5 job. His performance objectives and career path is very clear. He is promoted based upon meeting minimum performance standards over a specified period of time. If he meets these standards each year, he will gradually receive higher benefits and increasing responsibility. If he fails to meet those standards, he will likely remain in his current position. While superior performance may bring praise from his colleagues and superiors, it will not increase the rate at which he is promoted or bring any additional, tangible reward. In this system, how is property used (or not used) as an incentive to induce greater economic output?
- Property can be used as an incentive if persons interested in the property are made to understand that they will have ownership rights in the property to not only use but also retain the same without the threat of having someone else take possession of it. In a job environment, an incentive is an object, item of value or desired action or event that spurs and employee to do more of whatever was encouraged by the employer through the chosen incentive. In the example from the question, property is used as an incentive by encouraging employees to work hard and achieve some standards so as to be promoted and have a bonus. The promise of a promotion and a bonus works as an incentive to encourage employees such as Jonathan to work hard and deliver. https://www.thebalancecareers.com/what-are-incentives-at-work-1917994
Property ownership rights allow individuals to possess and demonstrate the results of their own efforts. Individuals are then able to employ that property toward creating additional property. That is, individuals can use their acquired property (or provide it to others) with the intention of generating or acquiring ownership rights in more property. In furtherance of capital formation, the nature of property allows ownership rights in any resource to be divided among individuals. As such, individuals can employ their resources collectively in the creation or acquisition of new property.
- Example: Abe’s ownership of property allows him employ the services of Bob in exchange for providing Bob with a form of property. Bob’s effort generates additional property for Abe, which Abe can use for the creation of additional property.
Discussion: Can you think of any other examples of how ownership rights allow individuals to accumulate or grow economic value or wealth?
Practice Question: Jane is renting an apartment in New York for $2,000 per month. She decides to purchase a home because it will be financially advantageous. She buys a very small apartment for $350,000. Her mortgage each month is $1,650 and her property taxes are $600. Of her mortgage payment, $1000 goes to principal, while $650 goes to interest. In this scenario, how does owning property allow for capital formation where renting an apartment does not?
- Capital formation is a term used to describe the net capital accumulation during an accounting period. Capital formation ensures that a person enjoys ownership rights to use the property to create and acquire other property. For instance, a person can use their property to gain monetary rewards. In the example from the practice question, owning a home as opposed to renting an apartment, provides Jane the opportunity to rent out a room and use the money she receives as either an investment for the purposes of creating or acquiring other properties or use the same to pay off the mortgage payments. In the end, owning a home will not only give her ownership rights that she could not enjoy willing renting an apartment but it does create the opportunity for more capital formation. https://marketbusinessnews.com/financial-glossary/capital-formation/
Blonski, Matthias and Spagnolo, Giancarlo, Relational Contracts and Property Rights (June 2002). University of Mannheim Working Paper. Available at SSRN: https://ssrn.com/abstract=340502 or http://dx.doi.org/10.2139/ssrn.340502
Miceli, Thomas J. and Sirmans, C. F., Time-Limited Property Rights and Investment Incentives. Journal of Real Estate Finance and Economics, Vol. 31, No. 4, 2005. Available at SSRN: https://ssrn.com/abstract=698261
Vickers, John, Competition Policy and Property Rights (February 19, 2010). The Economic Journal, Vol. 120, Issue 544, pp. 375-392, May 2010. Available at SSRN: https://ssrn.com/abstract=1601556or http://dx.doi.org/10.1111/j.1468-0297.2010.02360.x
Sonin, Konstantin, Why the Rich May Favor Poor Protection of Property Rights (December 1, 2002). Journal of Comparative Economics, Vol. 31, No. 4, pp. 715-731, 2003. Available at SSRN: https://ssrn.com/abstract=386102 or http://dx.doi.org/10.2139/ssrn.386102