Insider Collusion as a Threat to Property Rights: Experimental Evidence

Abstract

We provide causal evidence on how a community's formal institutions and social structure jointly affect the value of its land to outside investors. Using an experiment in Benin, we show that potential urban investors perceive a higher risk of expropriatory collusion among rural villagers—and thus invest less—when villages lack formal land records and exhibit strong social tightness. We also find that outsiders remain wary of investing in villages with a tight social structure even with formalization, indicating that both local formal institutions (property records) and informal ones (village social structure) affect the collusion risk perceived by outsiders. Our results therefore suggest that in addition to creating formal records of land ownership, well-designed property institutions should also guarantee the impartial treatment of outsiders.