Market Correlation and Property Rights

This paper examines the origins of property rights in the presence of production uncertainty. Since stealing others' possessions is permitted under anarchy, the winner is able to enjoy the lion's share of total outputs produced by all parties, and this generates a diversification effect, since the random outputs are polled together. Taking this effect into account, we characterize the subgame-perfect equilibrium for our two-stage game. Specifically, the emergence of property rights is shown to depend on players' incentives to fight, variances, and market correlations. The model predicts that property rights are more likely to emerge when market correlations increase.