Assessing The Value Of Property Rights For Economic Development

Given the prevalence of squatter communities in the developing world, ambitious and costly programmes for granting title to land have been proposed as a means of assistance. New research by Jean Lanjouw and Philip Levy, published in the latest issue of the Economic Journal, suggests that these programmes will be most useful if they are targeted at new and disorganised communities and designed to reach households of women and children.

Strong property rights are often taken as an absolute prerequisite for a market economy to function well. Lanjouw and Levy show ways in which those rights can develop without government involvement. In particular, their research shows that informal claims on property can partially substitute for formal property rights. Homeowners in urban Ecuador were able to sell and rent their properties even in the absence of formal property rights. But having a property title was still valuable: on average, it added up to 23.5% to the value of a home.

The study draws a distinction between those types of property claims that can be readily transferred from one owner to the next (such as legal title) and those that are non-transferable (such as long -time residence on the property).

This distinction implies that the benefits of granting official ownership can vary widely. For example, the probability that someone could sell an untitled property was estimated to be just 16% if the property was in an 8 -year old community established without an organiser. In a community 18 years old, the probability rose to over 50%. The
advantage of holding formal title, which would take the probability to near 100%, is thus greater in younger communities.

Oddly, the same strong informal claims that may let a household comfortably rent or retain a property may impede a sale, since the claims are non-transferable and the new purchaser cannot be sure the seller won''t try to exercise them at a later date. Formal title removes this concern.

These results come from carefully designed field surveys in Guayaquil, Ecuador in 1996. Households in low- and middle-income communities were asked about their claims to their property, the value of their property, and their ability to sell or rent it. This study differs from previous work on the value of formal title in that the benefits are
calculated from households'' own perceptions of title''s effect, rather than from predicted benefits based on the characteristics of the property.

''Untitled: A Study of Formal and Informal Property Rights in Urban Ecuador'' by Jean O. Lanjouw and Philip I. Levy is published in the October 2002 issue of the Economic Journal. Lanjouw is Senior Fellow, The Brookings Institution and The Center for Global Development and Associate Professor, University of California at Berkeley; Levy is Associate Professor of Economics, Yale University and Academic Director, Yale Center for the Study of Globalization.