Lueck 8 Miceli-Property Lato Not only does private ownership create incentives for optimal resource use, it also creates incentives for optimal asset maintenance and investment. With open access, no user has any incentive to use inputs that have a future payoff. To see the effect on investment, consider a slightly modified version of the model above. Let future output be Yr+/=f(xv), where xr is current investment, available at a market wage of w, and the interest rate is r:. The first-best use of the input(x,)must maximize R=f(xv/(1+ry-wa, and satisfy the first-order necessary conditionf'lxy/(+r)=wr. This outcome is generated under perfect private ownership. Now let r be the probability of expropriation(because of imperfect property rights)of the future output so that(1-rm) is the probability the investor's output remains intact. The solution to the investment problem(x, )is now to maximize R=f(xv/(1-77(+r)/-wxr which must satisfy(xv/( T)/(1+r)=wr. This clearly implies less investment(x, <x'). Pure open access means that no investor could claim future output(T=1), so x =0, and the rent from investment also equals zero In a recent article, Heller( 1998)identifies a situation in which a large number of uncoordinated individuals have the right to exclude users, thus creating a regime in which assets are under-used because each rights holder can exercise a"veto'over use. Because of the incentive to under use rather than over use the asset, Heller labeled this the anti-commons'and argues that many of the development problems in post-communist Europe are plagued with this problem of too many owners.Buchanan and Yoon(2000) formalize Heller's idea and give it additional application cases where competing bureaucracies can stifle development by exercising veto rights. De Sotos(2000) documentation of the difficulties of operating in an economy heavily laden with overlapping bureaucracies is a similar application(as discussed in Section 5. 1. 2). In a similar application, Anderson and Lueck(1992) study 'fractionated ownership of land on American Indian reservations. They found that divided ownership of agricultural landamong large numbers of heirs to the original owner )led to dramatic reductions in the value of agricultural itput It is not clear that the anti-commons phenomenon can usefully be regarded as a distinct property regime. The lack of investment incentives does not stem fromto much ownership, but simply from severely divided interests in which unanimous agreement is required for decision. In this sense, the anti-commons is like open access too many people have access and thus no one can gain from optimal use. The difference seems to be that the decisions considered are investment decisions, so the anti-commons can be viewed as open investment problem. The same land or apartments governed by too many will be overused while investment will be suboptimal 2 Writing before Adam Smith, Wm. Blackstone( Book ll, Chapter 1, 1765)recognized this and wrote: 'And the art of agriculture, by a regular connexion and consequence, introduced and established the idea of a more permanent property in the soil, than had hitherto been received and adopted. It was clear that the earth would not produce he I fruits in sufficient quantities, without the assistance of tillage: but who would be at the pains of tilling it, if another might watch an opportunity to seize upon and enjoy the product of his industry, art, and labor? This is based on the detailed analysis of Bohn and Deacon(2000) Heller and Eisenberg(1998)also call open access a problem of too many owners, whereas the economic models xamined above characterize this as a lack of ownershipLueck & Miceli – Property Law 7 Not only does private ownership create incentives for optimal resource use, it also creates incentives for optimal asset maintenance and investment. With open access, no user has any incentive to use inputs that have a future payoff.25 To see the effect on investment, consider a slightly modified version of the model above.26 Let future output be Yt+1 = f(xt), where xt is current investment, available at a market wage of w, and the interest rate is r. The first-best use of the input ( * t x ) must maximize R = f(xt)/(1+r) – wtxt and satisfy the first-order necessary condition f’(xt)/(1+r) = wt. This outcome is generated under perfect private ownership. Now let π be the probability of expropriation (because of imperfect property rights) of the future output, so that (1-π) is the probability the investor’s output remains intact. The solution to the investment problem ( t x π ) is now to maximize R = f(xt) [(1-π)/(1+r)] – wtxt which must satisfy f’(xt) [(1- π)/(1+r)] = wt. This clearly implies less investment ( * t t x x π < ). Pure open access means that no investor could claim future output (π = 1), so oa t x = 0, and the rent from investment also equals zero. In a recent article, Heller (1998) identifies a situation in which a large number of uncoordinated individuals have the right to exclude users, thus creating a regime in which assets are under-used because each rights holder can exercise a ‘veto’ over use. Because of the incentive to under use rather than over use the asset, Heller labeled this the ‘anti-commons’ and argues that many of the development problems in post-communist Europe are plagued with this problem of ‘too many owners.’ Buchanan and Yoon (2000) formalize Heller’s idea and give it additional application in cases where competing bureaucracies can stifle development by exercising veto rights. De Soto’s (2000) documentation of the difficulties of operating in an economy heavily laden with overlapping bureaucracies is a similar application (as discussed in Section 5.1.2). In a similar application, Anderson and Lueck (1992) study ‘fractionated’ownership of land on American Indian reservations. They found that divided ownership of agricultural land (among large numbers of heirs to the original owner) led to dramatic reductions in the value of agricultural output. It is not clear that the anti-commons phenomenon can usefully be regarded as a distinct property regime. The lack of investment incentives does not stem from ‘too much ownership’, but simply from severely divided interests in which unanimous agreement is required for decision.27 In this sense, the anti-commons is like open access: too many people have access and thus no one can gain from optimal use. The difference seems to be that the decisions considered are investment decisions, so the anti-commons can be viewed as open access investment problem. The same land or apartments governed by ‘too many’ will be overused while investment will be suboptimal. 25 Writing before Adam Smith, Wm. Blackstone (Book II, Chapter 1, 1765) recognized this and wrote: ‘And the art of agriculture, by a regular connexion and consequence, introduced and established the idea of a more permanent property in the soil, than had hitherto been received and adopted. It was clear that the earth would not produce her 1`fruits in sufficient quantities, without the assistance of tillage: but who would be at the pains of tilling it, if another might watch an opportunity to seize upon and enjoy the product of his industry, art, and labor?’ 26 This is based on the detailed analysis of Bohn and Deacon (2000). 27 Heller and Eisenberg (1998) also call open access a problem of ‘too many owners,’ whereas the economic models examined above characterize this as a lack of ownership