Arruñada, Zanarone and Garoupa, ‘Property Rights in Sequential Exchange’

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.

Arruñada, Benito and Zanarone, Giorgio and Garoupa, Nuno M, Property Rights in Sequential Exchange (November 21, 2017). UPF Economics and Business Working Paper Series 1588.

First posted 2017-11-28 06:35:19

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