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Property Rights in Sequential Exchange
Journal of Law, Economics and Organization (2019)
  • Benito Arrunada, Universitat Pompeu Fabra
  • Giorgio Zanarone, CUNEF
  • Nuno Garoupa, George Mason University
We analyze the “sequential exchange” problem in which traders have imperfect information on earlier contracts. We show that under sequential exchange, it is in general not possible to simultaneously implement two key features of markets—specialization between asset ownership and control, and impersonal trade. In particular, we show that in contrast with the conventional wisdom in economics, strong property rights—enforceable against subsequent buyers—may be detrimental to impersonal trade because they expose asset buyers to the risk of collusive relational contracts between owners and sellers. Finally, we provide conditions under which a mechanism that overcomes the tradeoff between specialization and impersonal trade exists. We characterize and discuss such mechanism. Our results provide an efficiency rationale for how property rights are enforced in business, company and real estate transactions, and for the ubiquitousness of “formalization” institutions that the literature has narrowly seen as entry barriers.
  • property rights,
  • enforcement,
  • contracts,
  • incomplete information,
  • impersonal exchange.
Publication Date
Citation Information
Benito Arrunada, Giorgio Zanarone and Nuno Garoupa. "Property Rights in Sequential Exchange" Journal of Law, Economics and Organization Vol. 35 Iss. 1 (2019) p. 127 - 153
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