December 20, 2005
Do Courts Matter?
Renting something is a contractual relationship. Owning something isn't -- it's a status relationship against the whole world. If a system isn't good at enforcing contractual rights, might we expect to see less renting and more owning? Does the state's contract law regime affect allocation of ownership rights?
Pablo Casas-Arce (Oxford-Economics) and Albert Saiz (Penn-Wharton) (left) look at that question in a new paper, Do Courts Matter? Rental Markets and the Law. Here's the abstract:
We argue that the allocation of ownership rights will minimize enforcement costs when the legal system is inefficient. In particular, when legal enforcement is costly, there will be a shift from
contractual arrangements that rely on such enforcement (such as a rental agreement) towards other forms that do not (such as direct ownership). We then test this prediction on data on the rental housing market, and show that costly enforcement of rental contracts hampers the development of such a market in a cross-section of countries. We argue that this association is not the result of reverse causation from a developed rental market to more investor-protective enforcement. The results provide supportive evidence on the importance of contract enforcement for the development of financial and other markets.
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