"Who's the thief?": Asymmetric Information and the Creation of Property Rights

Abstract

This paper studies the creation of property rights in a state of anarchy and in the presence of uncertainty about a potential appropriator's ability. In a game of conflict, securing property can be achieved by spending resources for protection. We show that secure property rights will never emerge in equilibrium. The reason for this finding is not that it is not possible to secure property in principle, but that because of uncertainty agents will choose to protect their possessions against an expected appropriator and not against the most able one. Hence, agents voluntarily expose themselves to the risk of losing ownership. This finding has important consequences, since secure property rights are a fundamental prerequisite of economic activity, and insecure property may for example hinder the exploitation of mutually beneficial trade opportunities or distort investment and production incentives.Asymmetric Information, Property Rights, Conflict