The Demsetz Thesis and the Evolution of Property Rights

Merrill, Thomas W.

Both conventional price theory and standard economic accounts of tort and contract law assume fixed property rights. In fact, however, property regimes are not static but change over time. Given the assumption of fixed property that otherwise prevails in economic literature, explaining the evolution of property rights is one of the great challenges for the economic analysis of law. The point of departure for virtually all efforts to explain changes in property rights is Harold Demsetz’s path-breaking article, “Toward a Theory of Property Rights.” As this brief summary suggests, the Demsetz article leaves a number of important questions unresolved. Demsetz was explicit about the cost-benefit criterion for change in property rights, offered a sophisticated account of the benefits of property, and included one compelling illustration of his thesis. But the article said nothing about the factors that determine the costs of a property regime. It said virtually nothing about the precise mechanism by which a society determines that the benefits of property exceed the costs, other than to disclaim any position on whether this would necessarily entail a “conscious endeavor.” And it said virtually nothing about the form that emergent property rights are likely to take, other than to observe that whether a society adopts private property or state-owned property may turn in part on the “community’s tastes” for collectivism. Thus, the Demsetz article leaves more than ample room for further scholarly development.


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The Journal of Legal Studies

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The University of Chicago Press
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November 11, 2015