Property Rights Revisited

The importance of institutional governance, such as a strong rule of law, a lack of corruption, etc.  for growth and development is widely recognised within development economics. Among the different aspects of the quality of governance, the protection of property rights holds a singular place. Its absence prevents people from entering the market economy, thus negatively impacting economic growth. Over the last two decades, numerous studies have tried to quantify the effect of property rights on a wide range of societal outcomes, including growth, trade, and, to a lesser extent, inequality. However, a major limitation of these studies has been the data measuring property rights. These suffer from a number of shortcomings, including a lack of availability, focus, and objectivity. In this paper, we try to address this gap by composing a new index of property rights that strictly focuses on the protection of these rights.  We do this for as wide a group of countries and as long a timespan as possible, increasing the index coverage by as much as 45% compared to other indexes. We subsequently use this index to take another look at the effect of property rights on income inequality. Most importantly, we have found that a strengthening of the security of property rights only reduces inequality in countries with strong democratic institutions.  Our results indicate that it is the government’s redistributive effort (through taxes and transfers) that is key to ensuring a more equal society. Conversely, where democracy is under threat, a strengthening of property rights increases inequality, both before and after government intervention. Extrapolating these findings, this study indicates that development outcomes depend as much on the interplay between different aspects of governance as on their individual strength. 

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