Wealth Destroying Property Rights

According to conventional wisdom, privatizing the commons will create wealth. Yet in cases found throughout the developing world, privatizing the commons has destroyed wealth. To explain this phenomenon, we develop a theory of wealth-destroying private property rights. Privatization’s effect on social wealth depends on whether privatizing an asset confers net gains or imposes net losses on society. The decision to privatize, however, depends on whether privatizing an asset confers net gains or imposes net losses on property decision makers. When decision makers are residual claimants, these effects move in tandem; privatization occurs only if it creates social wealth. When decision makers are not residual claimants, these effects may diverge; privatization occurs if it benefits decision makers personally even if privatization destroys social wealth. We apply our theory to understand wealth-destroying land privatization in Kajiado, Kenya.