The literature on economic development underscores the significance of well-defined property rights. Property rights help people to accrue the benefits of their own productive efforts. In fact, an extensive body of empirical literature confirms that land titling gives rise to a wide range of positive effects, including significant increases in property value, household investment and agricultural productivity, among others.

A natural experiment and previous studies

In a series of papers written with my co-authors, we exploited a natural experiment that allowed us to study the effects of land titling on several outcomes of interest. The natural experiment started when a group of about 1,800 families in Argentina took over unoccupied tracts of land in San Francisco Solano, in the municipality of Quilmes, in 1981. The squatters believed that the land was public property, but in fact it was made up of plots owned by thirteen different people. In 1984, the land was expropriated under the terms of a provincial law. Eight of the owners accepted the offer made by the government, and a ninth one gave up his title to his land after more than ten years of legal proceedings. The squatters on these tracts of land received land titles, while the rest of the occupants did not. Given that the squatters did not know which owners would give up their land and that, as our studies show, there were no systematic differences between the characteristics of the squatters who eventually received title to the land that they had settled on and those of the squatters who did not receive title, we can estimate the causal effect of titling by comparing the outcomes for those who received titles and those who did not.

Galiani and Schargrodsky (2004) found that titling had a considerable impact on short-run indicators of child health but that it had no effect on a long-run health indicator. However, we found that regularization considerably reduced the teenage birth rate, which is a major issue in the population under study. Galiani, Di Tella and Schargrodsky (2007) found that titling had a significant impact on the beliefs of titleholders. More specifically, we found that people who had been granted title held beliefs that were more compatible with the workings of a free market. Finally, Galiani and Schargrodsky (2010) found that titling had a sizable effect on household investment. Moreover, the effects on the internal composition of the households with land titles were quite noteworthy as well, as these families tended to have fewer non-nuclear members in the household and fewer children. Lastly, although we found positive effects in terms of children’s educational attainment, we did not find any significant effect on access to credit or earnings (see this previous post here).

The deregularization process

In spite of how promising these results were, in a follow-up study we found that there were a number of cases in which these new owners lost their legal tenure rights, with title to the land then falling into a grey area. This happened following events such as divorce, death of the titleholder, sale of the house, etc. We refer to this process as “deregularization”.

The results of the follow-up study showed that more than one third of the properties of the households studied in Galiani and Schargrodsky (2016) had changed ownership. The incidence of irregular tenure was 28.1% for the sample as a whole, but reached almost 80% when we considered only the households with changes in property ownership. Additionally, the rate of irregular ownership was higher when transfers were within the same family and was especially high in cases in which the legal owner had died. As for inter-family transfers, only one third of the new occupants decided to regularize their title, in all cases as a consequence of a sale.

Motivations for regularization

The high rate of regularization led us to ask ourselves which factors determine the decision to regularize. We assessed this question using a formal model that met the following criteria. First, we needed a characterization of the decision to regularize. We considered the factors that we believe sum up the essential elements involved in reaching that decision: regularization is costly but deferrable. This means that the owners must not only decide whether to regularize their land title or not, but, if they do decide to regularize it, they must also decide when to do so.  Second, not having title to the land occupied by the household implies that it is bearing a risk of expropriation which increases over time. The benefit of regularization is that this risk is avoided. The optimal decision will be based on an evaluation of the costs and benefits of regularizing at each point in time.

Our model suggests that two factors come into play in the decision to regularize. The first is expropriation risk. We cannot say much about this variable, since it is intrinsic to the particular situation of each individual household and is unobservable to us as researchers. The other factor is the cost of regularization relative to the total value of the property. As is to be expected, the higher this ratio is, the less likely individuals are to regularize their title to their land. In our view, this variable was an extremely influential one, since the cost of regularization was indeed very high when compared to the value of the property in the case under study. We asked the local real estate agent and several lawyers in the area to provide us with estimates of the value of these properties and of the regularization costs. The mean value of the properties under study was USD 11,700, while the cost of regularization for a property of this value ranges from USD 2,300 to USD 3,200, depending on the type of legal procedure involved.

A fundamental reason why we are so interested in the cost of regularization is that we believe that it can be influenced by public policy. We will now explore several alternative titling schemes and assess their corresponding costs.

Land titling schemes

According to Shavell (2004), the purpose of property titles is to identify the owner. This has several advantages, including those of deterring theft, reducing information asymmetries in sale transactions, and making it possible to use property as collateral.

Arruñada (2012) discusses two alternative titling systems. The first is the recordation of deeds. In a system of recordation, the entire history of claims on a property is registered. Hence, the register must then be purged in order to determine who the actual owner is. The second is the registration of rights system. In this case, registration officials conduct mandatory purges of the claims to a property before registering the rights to it. If a transaction does not impinge upon the rights of others, or if these other parties give their consent, then the transaction is registered and the acquirer becomes the legal right holder.

According to Arruñada (2012), registration systems are generally thought to have larger fixed costs than recordation systems. On the other hand, given that the act of registration makes the person the legal titleholder, the latter system is usually considered more trustworthy. Viewed on this basis, the optimal choice between the two systems appears to depend on a classic trade-off between cost and reliability. Arruñada and Garoupa (2005) study how the optimal choice between systems depends on the value of the property in a formal model. Their model suggests that owners of low-value property prefer not to register it at all, while those with property of an intermediate value prefer a system of recordation. Lastly, people with high-value homes prefer a system of registration.

When owners have to choose one of these alternatives, their optimal decision can be distorted. If a system of recordation is adopted, high-value houses will be under-assured, since their owners would rather have a system of registration. On the other hand, under a system of registration, the houses of intermediate value will either be registered and over-assured or will be unregistered and under-assured. These conclusions suggest that, for the people in San Francisco Solano, a system with lower administrative costs is possibly a better fit.

Another factor that is worth taking into account is that titling systems are generally thought to cover a wide range of contingencies by protecting against expropriation, lowering information asymmetries, facilitating the eviction of defaulting tenants, serving as collateral, etc. However, our studies show that some of these attributes, especially those related to the credit market, were not relevant for the population under study. It is possible that a simplified system would be easier to administer and could yield additional cost savings. Such a system would have a greater capacity to adjust to the needs of the poor. In fact, the Commission on Legal Empowerment of the Poor (CLEP) (2008), after studying several cases of targeted interventions, concluded that programs that use simple processes to grant property rights are a practical and inclusive tool which allows for greater security in land tenure.

Closing remarks

In our opinion, loss of legal title to land is a cause for concern. In the case under study, titling came only after a long struggle on the part of many families and was made possible only by the investment of government resources. Although these efforts yielded substantial benefits for the families in question, we believe that the deregularization process that followed can undermine the benefits of land titling programs such as the one that we studied. This is why we postulate that a simplified regularization system could mitigate these constraints and help to ensure that such programs will have a sustained long-term impact.

References:

Arruñada, Benito (2012). Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries, University of Chicago Press.

Arruñada, Benito, and Nuno Garoupa (2005). “The Choice of Titling System in Land”, Journal of  Law and Economics, vol. 48, pp. 709-727.

Commission on Legal Empowerment of the Poor (CLEP) (2008). Making The Law Work for Everyone.  http://www.unicef.org/ceecis/Making_the_law_work_for_everyone.pdf

Di Tella, Rafael, Sebastian Galiani and Ernesto Schargrodsky (2007). “The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters “, Quarterly Journal of Economics, vol. 122, No. 1, pp. 209-241.

Galiani, Sebastian, and Ernesto Schargrodsky (2004). “Effects of Land Titling on Child Health”, Economics and Human Biology, vol. 2, No. 3, pp. 353-372.

Galiani, Sebastian, and Ernesto Schargrodsky (2010). “Property Rights for the Poor: Effects of Land Titling”, Journal of Public Economics, vol. 94, Nos. 9-10, pp. 700-729.

Galiani, Sebastian and Ernesto Schargrodsky (2016). “The deregularization of land titles”, Man and the Economy, Volume 3, 2016, pages 169-188

Shavell, Steven (2004). Foundations of Economic Analysis of Law, Harvard University Press.