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Fall 2020

ISSN 0890-913X

Volume 35, Number 3

The Law of the Taxi: Informal Property Rights Institutions in the Uninhibited State

Diana W. Thomas, Creighton University

Michael Clark, Christensen Associates

Humberto Alba Castillo,

Kevin D. Gomez, Creighton University

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TheJournalofPrivateEnterprise35(3),2020,49–62TheLawoftheTaxi:InformalPropertyRightsInstitutionsintheUninhibitedState*DianaW.ThomasCreightonUniversityMichaelClarkChristensenAssociatesHumbertoAlbaCastilloKevinD.GomezCreightonUniversity______________________________________________________AbstractWeusetheprivateprotectioninstitutionwediscoveredwhileinterviewingtaxicabdriversinTrujillo,Peru,toillustrateatheoryofclubs.Thisinstitutionincentivizesjointproductionofsecuritybytaxicabcompanies.Historicepisodesofsuchprivateinstitutionsabound,andtheyareincreasinglyimportantindevelopedcountriestodaywherepublicpoliceareunderfundedandoftenunreliable.Unlikeindevelopedcountries,whereprivatesecurityprovidersusuallyoperatelegallyandoftencollaboratewithpubliclawenforcementagencies,privatesecurityinthedevelopingworldisoftenextralegalandnotofficiallysanctioned.Wecontributetotheliteratureonprivateenforcementmechanismsbyprovidinganexampleofaprivateprotectioninstitutionthatexistsinthedevelopingworldtoday.______________________________________________________JELCodes:P5,O0,D7Keywords:privateenforcementmechanisms,policing,Peru,taxicabcompanies,protective-tierentrepreneurs*WethankBrentCrosbyforresearchassistanceandtranslation.
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50Thomasetal./TheJournalofPrivateEnterprise35(3),2020,49–62I.IntroductionThefactthatfunctioninglegalinstitutionsarerequiredforeconomicdevelopmenthasbeenwidelydiscussedintheeconomicdevelopmentliterature(Boettke1994;HallandJones1999;deSoto2000;Acemoglu,Johnson,andRobinson2001;AcemogluandJohnson2005;KerekesandWilliamson2008).However,themereformalizationofpropertyrightsorcontractinginstitutions,aspromotedbyHernandodeSoto(2000)andothers,doesnotseemtobesufficientforgoodeconomicoutcomes.WilliamsonandKerekes(2010)show,forexample,thatlandtitlingdoesnotresultinthesamebenefitsassociatedwithsecurepropertyrights.Theyarguethatwhenformalenforcementofdejurerightsisweakorabsent,theeconomicbenefitsofsecurepropertyrightswillremainelusiveevenwitheffortstoformalizethoserights.Anobviousalternativetoformalenforcementofcontractsandpropertyrightsisenforcementthroughprivatesecurity,protection,andcourts(Besley1995).Historicexamplesofsuchprivatemechanismsfortheenforcementofrules,rights,andregulationsabound(Greif1989,1993;AndersonandMcChesney1994;AndersonandHill2004;Milgrom,North,andWeingast1990;ZerbeandAnderson2001;Stringham2002,2003;Leeson2006),andprivateenforcementmechanismsarebecomingincreasinglyimportantindevelopingcountriestodayaspublicpoliceareunderfundedandoftenunreliable(Benson,Rasmussen,andKim1998;Pastor2003;vanStedenandSarre2007).Privatemechanismsofproperty-rightsenforcementoftenemergefromtheorganizationalstructuresofclubs.Successfulclubshavebothformalandinformalinstitutionalarrangementstoprovidetheeffectiveenforcementofpropertyrightswhilealsodrawingrevenuefromthegoodsandservicesoffered(Buchanan1965).Theprovisionofproperty-rightsenforcementisacostlyendeavorandsusceptibletofreeriding,whereindividualsconsumetheservicewithoutpayingforit.Forthisreason,thisserviceisgenerallyconsideredapublicgoodandisprovidedbythestate.Clubstructures,however,canalignincentivesappropriatelytoovercometheseconstraints.Thispapercontributesanexampleofaprivateprotectioninstitutionthatexistsinthedevelopingworldtoday.Unlikeinthecaseofdevelopedcountries,whereprivatesecurityprovidersusuallyoperatelegallyandoftencollaboratewithpubliclaw-enforcementagencies,privatesecurityinthedevelopingworldisoftenextralegalandnotofficiallysanctioned.Theprivateprotectioninstitutionwe
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Thomasetal./TheJournalofPrivateEnterprise35(3),2020,49–6251discoveredwhileinterviewingtaxicabdriversinTrujillo,Peru,specializesinprovidingtheincentivesrequiredforjointproductionofsecuritybytaxicabcompanies.Taxicabcompanies,ratherthanjustspecializingintaxiservices,alsoprovideprotectionoftheirpropertyfordriverswhoaremembersofacompany.Thisprivateinstitutionfortheprotectionofpropertyisextralegaltotheextentthatsomeofitsservicesareillegalinthecontextofexistinggovernmentinstitutions.OurexampleprovidesevidenceforLeesonandBoettke’s(2009)theoryoftwo-tieredentrepreneurship,whichsuggeststhatwhengovernmentsinthedevelopingworldcannotordonotprotecttheircitizensagainstprivatepredation,institutionalentrepreneurswilldevelopprivatemechanismstoprotectpropertyrights.Theycallthistypeofentrepreneurshiphigher-tierentrepreneurship,asdistinctfromlower-tierorproductiveentrepreneurship.Additionally,theprivateenforcementmechanismwithintheTrujillotaxicabcommunityhighlightsthebenefitsofclub-likemechanismsfortheprivateprovisionofpublicgoodsinsmaller,developingeconomies.Webeginbyreviewingtheliteratureonprivateinstitutionsforpolicingandprotectingpropertyandtheclubstructuresfromwhichtheyemerge.Section3describestheprivatepropertyrightsenforcementregimewediscoveredamongtaxicabdriversinPeru.Section4describestheclubstructureallowingforthetaxicabcompanies’success,andsection5concludes.II.LiteratureLeesonandBoettke(2009)suggestthatlower-tierorproductive-tierentrepreneurscanoperateeffectivelyinasocietywherepropertyrightsarewellestablishedandwheretheyhaverecoursetoaformallegalsystemtoresolvecontractualdisputesortheft.Whenadjudicatingdisputeswithintheformallegalsystemiscostlyandtimeconsuming,however,propertyownerscannotrelyonitforprotection.Insuchcases,lower-tierentrepreneurshipismoredifficult.Instead,entrepreneurshipisrelegatedtoahigherlevelofinstitutionalinnovation.Whenformalpropertyrightsareweak,entrepreneurshaveanincentivetodevisetheirowninformalmeansofprotectingtheirpropertyrightsthroughprivatesecurity.Theseinformalinstitutionsallowthemtocompensateforineffectiveformalinstitutions.Morespecifically,entrepreneurscanoperateattwodistincttiers:aproductiveorlowertierandaprotectiveorhighertier.When
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52Thomasetal./TheJournalofPrivateEnterprise35(3),2020,49–62propertyrightsinstitutionsarestrong,productive-tierentrepreneursdiscovernewtechnologiesthatexpandproduction.Whenpropertyrightsinstitutionsareweak,productive-tierentrepreneurshipisineffective.Inthiscase,entrepreneurshipisrelegatedtoahigherlevelofinstitutionalinnovation.Entrepreneursatthishighertierdiscoverinformalwaysofprotectingproperty.Protective-tierentrepreneurscanprovidepropertyprotectionwhengovernmentiseithertooweakortoostrong.Aweakgovernmentcannotadequatelyprotectproperty,whileastrongonecanengageinexcessiveexpropriation,whichweakenspropertyrights.Inbothinstances,itisprofitableforprivateentrepreneurstodiscovertechniquesthatcanprotectpropertyagainsteitherprivateorpublicpredation.Greif’s(1989,1993)Maghribitradersprovideanexcellentexampleoftheimportanceofhigher-tierentrepreneurshipintheabsenceofeffectiveformalpropertyrightsenforcement.Internationaltradeduringthetenthandeleventhcenturieswascharacterizedbymuchuncertaintyandgreatinformationalasymmetriesbetweenmerchantsandtheiroverseasagents.Inthefaceofthisgeneralcontractualuncertainty,agroupofJewishmerchants,knownastheMaghribitraders,developedaclosednetworktofacilitateeachother’stradingactivitiesindifferentlocationsaroundtheMediterraneanwithoutrelyingontheexistinglegalsysteminanyspecificlocation.Strongsocialbondsallowedforthedevelopmentofreputationandtrustsufficienttofacilitatelong-distancetraderelationshipsamongthecoalition.TheMaghribitraderswereabletodevelopaninformation-transmissionmechanismthatperformedbetterthananyotherexistingmechanismforcommunicatinginformationregardinganagent’sreputation.Bycreatingacoalition,traderscouldtransmitinformationbetweenmembersaboutagents’honesty.Allmembersofthecoalitionwouldpunishadishonestagent,whichincreasedthecostofdefection.ThelikelihoodofbeingpunishedbytheentireMaghribitradercoalitionmadeitmoreprofitableforanagenttobehonestinhisdealingswithmembers.Privateorinformalenforcementmechanismsarenotjustofhistoricalsignificance,however.Ellickson(1986)showsthateveninthemoderncontextofstrong,formalenforcementinstitutions,institutionalentrepreneurswilldeviseinformalenforcementmechanismswhenthecostsofformalenforcementaretoohigh.HeusesruralShastaCounty,California,asanexample.There,intheface
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Metadata [hide]
Title The Law of the Taxi: Informal Property Rights Institutions in the Uninhibited State
Authors/Creators: Diana W. Thomas, Creighton University
Michael Clark, Christensen Associates
Humberto Alba Castillo,
Kevin D. Gomez, Creighton University
Year: 2020
Volume: 35
Number: 3
Pages: 49 - 62
Publisher: The Association of Private Enterprise Education
ISSN: 0890-913X
Document Type: Articles
Keywords: private enforcement mechanisms, policing, Peru, taxicab companies, protective-tier entrepreneurs
Citation:
Thomas, Diana W.; Clark, Michael; Alba Castillo, Humberto; Gomez, Kevin D. / 2020. "The Law of the Taxi: Informal Property Rights Institutions in the Uninhibited State." The Journal of Private Enterprise, 35(3): 49-62.
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Title	The Law of the Taxi: Informal Property Rights Institutions in the Uninhibited State
Authors/Creators:	Diana W. Thomas, Creighton University Michael Clark, Christensen Associates Humberto Alba Castillo, Kevin D. Gomez, Creighton University
Year:	2020
Volume:	35
Number:	3
Pages:	49 - 62
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	private enforcement mechanisms, policing, Peru, taxicab companies, protective-tier entrepreneurs