Property Rights in Land

Published: 
Tuesday, September 20, 2011

Open landProperty rights are essential for market exchange. The definition of those rights, their enforcement, and their transferability all help determine the extent of trade and the rate of economic development and wealth creation. Recent research by Gary Libecap and Dean Lueck (2011) reveals how the methods of demarcating land boundaries affect both the value of land and the course of economic progress.

There are two methods of demarcating land and thus establishing the physical elements of property rights in it: metes and bounds (MB) and the rectangular system (RS). Under the MB system, individuals define land parcels in such terms as impermanent natural features (rocks, trees, streams), structures (walls, monuments), and adjacent properties ("beginning at the southwest corner of Peter Hill’s ranch"). This decentralized system, which has existed for millennia, is the most prevalent in the world, requires no central direction, and typically yields irregularly shaped parcels that conform to the circumstances of local topography and early settlement.

The rectangular system, used by the Romans and revitalized by the 18th century emergence of modern survey methods, now begins with the establishment of a precise initial “point of beginning” and its associated principal meridian of longitude and parallel of latitude. All property boundaries are defined by reference to this initial grid point. The system requires a centralized decision for its creation and implementation yielding land parcels that are squares or collections of squares.

The metes and bounds system leads to parcels that conform closely to local topography, thereby enhancing the productivity of the land. Implementation requires no specialized surveying instruments or technical knowledge. In contrast, the advantage of the rectangular system is that a person a world away can understand the shape and location of a parcel simply by its description relative to the reference grid. Such understanding of an MB-demarcated parcel, by contrast, may require highly idiosyncratic, localized knowledge of the shape of adjoining property, or a stream, or even the location of a particular tree.

Early American settlers brought the MB system with them from England, and its use dominated land demarcation in the thirteen colonies. To more easily dispose of federal lands in the western territories, the Land Ordinance of 1785 ordered that the rectangular system be implemented throughout the rest of the United States. A portion of central Ohio called the Virginia Military District (VMD) was already slated to be demarcated using metes and bounds, but the surrounding portions of Ohio were laid according to the rectangular system. Libecap and Lueck focus their study on the VMD and its environs, enabling them to examine the impact of land demarcation while controlling for other factors, such as location and soil fertility, that might also shape land use decisions and values.

The authors find that the standardization benefits of the rectangular system clearly outweighed the metes and bounds benefits of topographical conformation. Hence the value of a typical plot of land in central Ohio was raised by 20 to 25 percent if it was RS-demarcated rather than MB demarcated. The net effect of the rectangular system varied considerably, depending on the ruggedness of the terrain. On flat ground RS raised property values by at least 30 percent, but on rugged terrain the advantages of this system could shrink to zero or even turn negative. The rectangular system was thus a superb means of demarcating property in the relatively flat expanses of the Great Plains, but in mountainous (or otherwise topographically idiosyncratic) areas RS has the capacity to diminish the value of property because it forces “one shape fits all.”

Libecap and Lueck show why, on balance, the rectangular system raised land values. The greater precision afforded by the system dramatically reduced property boundary disputes, and also substantially increased the liquidity (or marketability) of land. People were willing to pay more for RS demarcated land because they could later sell it more easily and because in the interim their ownership status was far less likely to be challenged by their neighbors.

The authors also examine the long run consequences of property demarcation. They find that the RS-induced enhancement to land values persists today, with the gap between RS and MB land values actually increasing during the 20th century. By making land more readily marketable and less subject to legal dispute, the rectangular system encouraged more immigration by settlers and also accelerated the conversion of farmlands to more valuable commercial, residential, and industrial uses. Urbanization also proceeded more rapidly in those areas with the rectangular system.

Although the rectangular system was imposed by the federal government, something like it conceivably might have emerged spontaneously as surveying costs fell in the 18th century, just as railroads privately decided to standardize their track gauges. Nevertheless, the rectangular system relied on the initial creation of a reference grid system on a vast scale, something that would have been difficult—if not impossible— for any private party to implement.

The episode illustrates two key points. First the definition, enforcement, and transferability of property rights play a key role in wealth creation and economic development. Second, when it comes to the establishment of property rights systems, it appears that there may be an important and productive role for government to play—a phrase not often uttered in this column.

REFERENCE

Libecap, Gary and Dean Lueck. 2011. The Demarcation of Land and the Role of Coordinating Property Institutions. Journal of Political Economy. 119(3): 426–67.

Type: 
The effect of government policy changes on the private sector has been the unifying theme that ties together Daniel K. Benjamin's broad-scale research. He not only examines the outcomes of policy changes, but also the reasons behind the modifications.Taxes, unemployment, risk assessment, and drugs have been the focus of much of Benjamin's...
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