Relative Property Rights - Osvaldo Grajales.ppt

8/10/2019 Relative Property Rights - Osvaldo Grajales.ppt

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O S V A L D O G R A J A L E S

U N I V E R S I T Y O F A P P L I E D S C I E N C E S

S C H M A L K A L D E N

I N S T I T U T I O N A L E C O N O M I C S

P R O F . D R . K O N R A D B E I W I N K E L


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1. CONTRACTUAL OBLIGATIONS

People in modern society operate within a social network oflegally binding and legally nonbinding obligations intowhich they enter either voluntarily or though compulsion.

Relative property rights consist of a claim of a certainindividual (obligee), against one or more other individuals(the obligor/s), and can only be exercised by them.


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2. BASIC PRINCIPLES OF

CONTRACTUAL OBLIGATIONS

Contractual obligations can be prepared, concluded and exercised withinvarious institutional frameworks.

Neoclassical Economics - Crucial institutions are taken to be the market and

the firm

Focus on ideal types of the Perfect Market and the Profit

Maximizing - Obligations are controlled by competitionin a world full of information.

Neoclassical FirmContractual obligations are directed by an efficient

hierarchy. Which can process information instantly and

costlessly.


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Freedom of Contract

Enables the private owner of a property right , to transfer his property rightand the asset to which the right refers, to the locus where it is valued most

highly.

1. to conclude contract or not

2. to choose one`s partner(s) to a contract

3. to determine the contract`s content

4. to choose the form of the contract

5. freedom of will

6. the protection of third-party interests

The general idea animating this principle of freedom of contract is that each

individual is free to regulate the circumstances of his life himself.


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Liability from Contract- Contractual liberty is able to work if obligationscan be enforced by the state.

Role of LiquidityAbility to fulfill ones payment obligation. State some

times help through special pledges companies with liquidity troubles.

Sanctitys Promise- The obligation to keep ones promises.


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3. TYPES OF CONTRACTUAL OBLIGATIONS

Bilateral - where parties of the contract pledge to exchange performances

that both sides view as adequate and commensurate.Concept of Do, ut Deseach gives something to the other and receives

something in return.

Uniform Comercial Codedefines a Contract Sale as Both a present sale

of goods and a contract to sell goods at future time

Instant exchange (Zug um Zug)

Time gap between the fulfillment and the formation of the contract.

causes problems with transaction costs because of:

1.asymmetric information

2.transaction-specific investments


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3.1 ASSET SPECIFICITYWILLIAMSON

1. Site SpecificityClose relations between buyer and seller minimizing

inventory and transportation expenses

2. Physical Asset Specificity- Equipment and machinery that have lower

values in alternative uses

3. Human Capital Specificity- Learning by doing, investment or transferring

specific skills to a particular relationship

4. Dedicated AssetsWhen general investments that would not take place,

if not the particular customerderiving in excess capacity to the supplier.


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3.2 SALES CONTRACT

Provides for the permanent transfer of property rights in an asset from one

party to another by agreement.Uniform Commercial Code- a SALE consist in the passing of the tittle to

goods from the seller to the buyer for a determined price.

1- Precontractual Opportunism

Result s of asymmetric information. Seller knows more about his merchandise

than buyer does . i.e. selling second hand bad quality cars at the price of

good quality cars.2- Postcontractual Opportunism

Transaction-specific investments lead to opportunism. Can lead to contract

failure.


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3.3 LEASE CONTRACT

Renting or making use of an object for a price. The lease obliges the lessorto grant the lessee the use of the rented sache for the duration of thelease.

Types of lease in common law and civil law:

1- Of real property - an agreement between landlord and tenant

Who uses object and enjoys its benefits (Usus and Usus Fructus)

2- Of personal property - an agreement between lessor and lessee

Who just uses the object (Usus)

ostcontractualopportunism caused again by assymetric info or contract-specific investments.

Apartment example


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3.3 EMPLOYMENT CONTRACT

In German Civil Code The contract of service obliges the party who pledged

services to perform the promised services. The other party is obliged to grantthe stipulated compensation.

Labour Contract- Deals with services that are subject to instructions, that is a

relationship in which one side; the employer- has the right to control and

direct the other party employee, in the material details of how the work

must be performed. (Hierarchical transaction)

Employees can form coalitions.Precontractual Opportunism

Asymmetric information workers know their abilities better-partial

solution

Postcontractual Opportunism

Asymmetric information & specific investments

Even if a firm can monitor a worker`s effort in a very little cost, it will always

have incentive to say the monitored effort was low and to pay less.


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3.4 LOAN CONTRACT

The creditor of a money loan is obliged to place the agreed upon sum at the

debtor`s disposal. The debtor is obliged to pay the owed interest and toreturn the principal of the loan at maturity date to the creditor.

Precontractual Opportunism

Info asymmetry - Debtor knows his economic prospects and his integrity

better than creditor does.

Postcontractual Opportunism

Result of asymmetric info and specific investments.

Should focus on building long-term business relationships


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4 CONTRACTS THEORY ECONOMIST VIEWPOINT

Contracts and contracting process play vital roles in modern institutionaleconomics.

Klein stated Economists consider contracts as the means by which

transacting parties fully define future performance and allocate risks of

future contingencies


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4.1 THE AMBIGUITY OF THE TERM CONTRACT

Macneil stated It is possible to think of a whole spectrum of different types ofcontracts as defined from a legal standpoint.

Contracts at the extreme Relational pole entail strong personal involvement,

are long term, and anticipate the possibility of trouble as a normal part of

the ongoing association between the parties to the contract.


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5 ECONOMIC CONTRACT THEORIES

1. Agency-contract theory

2. Self-enforcing agreements

3. Relational contract


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Studies how economic actors can and do construct contractual arrangements.

Moral hazard - principal cannot be sure if the agent has put forth maximal effort. The

information asymmetry is the principal's inability to observe or verify the agent's action.

Performance-based contracts that depend on observable and verifiable output can often

be employed to create incentives for the agent to act in the principal's interest.

Adverse selection - principal cannot ascertain if the agent accurately represents his

ability to do the work for which he is being paid. the principal is not informed about a

certain characteristic of the agent For example, health insurance is more likely to be

purchased by people who are more likely to get sick.

5.1 AGENCY CONTRACT THEORY


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5.2 SELF-ENFORCING AGREEMENTS THEORY

Each party decides unilaterally whether the party is better off continuing or

stopping its relation with the other parties. It stops only if the current gain

from stopping exceeds the expected present value of his gains from

continuing.

No outside party intervenes to enforce the agreement, to determine whether

there has been violations, to assess damages, and to impose penalties.

A synonimous expression for this term is Implicit Contract. Both parts shall find

the equilibrium and Kronman list four devices as ideal types:

Hostages

Collaterals

Hands-Tying

Union


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5.3 RELATIONAL CONTRACT THEORY

The effect is based upon a relationship of trust between the parties. The

explicit terms of the contract are just an outline as there are implicit terms andunderstandings which determine the behaviour of the parties.

Application: cases with bilateral dependence of the contractual parties because of

the existence of transaction-specific investments.

Relational contracting approach includes the positive principal-agent theory

and the theory of self-enforcing agreements


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Relational contracts have limited guarantees by law, so opportunism is avoided

by means of nonlegal sanctions or , so-called, private ordering

Private orderings - consist of contractual arrangements which are protected by

law and are designed as governance structures to protect each party against

opportunism of the other side.

Relational contractsInformal agreements sustained by the value of future

relationships.

Integrated Form of Agreement (IFoA) (USA) - developed for Sutter Health

projects in California and used by some other healthcare providers


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5.4 TYPES OF PRIVATE ORDERING

1 Self-enforcing agreements

This agreement stands so long the parties believe the agreement ismutually beneficial and the agreement is not breached by either party.

2 Embeddedness

Refers to the degree to which economic activity is constrained by non-economic

institutions. In these cases economic activities such as "provisioning" are

"embedded" in non-economic kinship, religious and political institutions.

3 Tit-for-tat strategy

The strategy was first introduced Robert Axelrod's tournaments. Notably, it was

both the simplest strategy and the most successful.

An agent using this strategy will first cooperate, then subsequently replicate an

opponent's previous action. If the opponent previously was cooperative, the agent

is cooperative. If not, the agent is not.


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5.4 TYPES OF PRIVATE ORDERING

4 Private third-party-enforced contracts

Independent arbitrators must be required to resolve disputes andevaluate performance.

5 Regulation

Either private or public, is characteristic of third party

administration of a relational contract.

For example the regulator in the case of public utility, acts as an agent of

the suppliers and consumers of electricity.

6 Union

Of parties is the strongest form of protection against ex post

opportunism. This arrangement establishes a high level of legal protection

for a relationship between individuals.


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6 GOVERNANCE MODELS

4 Unified governance hierarchyThis is the case od of vertical integration in

which individual units give up their autonomy in order to make it more likely

that joint profit maximization. Structure is the most suitable in situations where

two parties find out that the most profitable mode of cooperation is as close

as possible in order to protect the highly specific investments.

5 Corporate governanceInvolves a mix of oof Hierarchy and Bilateral

governance. It is a complex institutional arrangement in which suppliers offinance to corporations Hierarchies try to assure themselves of securing a

return on their investments.


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6 WILLIAMSONS EFFICIENT GOVERNANCE MODEL


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THANK YOU FOR YOUR ATTENTION

Relative Property Rights - Osvaldo Grajales.ppt

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