Production Networks and Preferences for Property Rights

Abstract

What explains the development of property rights and democratic institutions? An influential literature places business interests at the center of institutional development: Property owners pressure the government for institutional protections to prevent government predation – in other words, for property rights. To make these commitments credible, owners demand influence over policy, creating formal channels of influence and precursors to democratic institutions. We ask when and which business owners demand public goods like property rights and when they instead seek out preferential policies, like transfers and market protection. We argue that property rights have heterogeneous benefits for firms. Those firms that rely more on contracts with other firms associate larger benefits with property rights improvements, in particular contract enforcement. They are concerned about government expropriation both due to their own risk and to the risks born by their business partners. The benefits should be especially large for those firms that lack political connections and fear politically supported takeovers. We assess the argument drawing on data from a survey of business executives – owners and managers – in Latin America. We find that executives with substantial production ties are more likely to claim that property and contracting rights are important, but the effects are largely confined to executives who lack political connections.