Property Rights and Time Preference
Robert F. Mulligan
Students of history may see mirrored in the charts and tables of interest rates over long periods the rise and fall of nations and civilizations, the exertions and the tragedies of war, and the enjoyments and the abuses of peace. They may be able to trace in these fluctuations the progress of knowledge and of technology, the successes or failures of political forms, the long, hard, and never-ending struggle of democracy with the rule of the elite, the difference between law imposed and law accepted.
This paper establishes a nexus between the established fields of constitutional political economy and macroeconomic capital theory. Constitutional political economy explores how legal and institutional structures emerge over time. The evolution of property rights has always been a central focus of this line of inquiry. Time preference is one of the most basic economic concepts. Theories of interest, term structure, and opportunity cost, are all dependent on time preference, which is also the basis for capital budgeting in modern finance. This paper establishes how and why the emergence of property rights supported a reduction of time preference, allowing for employment of capital in time-consuming means of production. This paper also argues that institutional imperatives inevitably lead to the systematic degradation of property rights, and a consequent increase in time preference.
As property rights became more secure through the evolution of governmental and legal institutions, individuals' subjective time preference should have decreased. This observation reinforces the subjectivist interpretation of economic phenomena. Not only are individual time preference rates subjective and unique, but the level of security of a particular individual's property rights may vary significantly across individuals in the same society, and furthermore, the relative importance individuals attach to property rights is entirely subjective, and may also vary significantly across individuals.
Property rights emerge with the evolution of civilization, government, and law, which remove some of the uncertainty facing the process of production (Menger 1871:70). The principal and irreducible source of this uncertainty, which is invariant to any institutional arrangement, is the fact that production takes place over time (Menger 1871:68). Nevertheless, government has emerged as the greatest single threat to property rights. Though subjective, time preference must have generally been extremely high in primitive, non-capital-using societies. Only as individuals come to value and recognize property rights, can they implement more productive, roundabout, capital-using production methods. The liberal order of Hayek's Great Society generally lowers individual time preferences by providing individuals the opportunity to discover and exploit roundabout means of production, which cannot be relied on in the absence of secure and dependably enforceable rights to own, use, dispose of, and transfer, land, capital, and one's own labor services, including embodied entrepreneurial talent and human capital.
Once governmental institutions become sufficiently evolved and sophisticated to require ongoing revenue, the very institutions which formerly provided increasing security for property rights, begin to act to destroy and subvert those rights. Populations which secured for themselves the blessings of the liberal order tend to break apart into competing interest groups seeking to monopolize the government's seemingly unlimited rent-extraction authority. The transition from a feudal to an industrial economy, and especially the realization of political liberalism, seems to markedly improve the protection afforded to individual rights, including property rights.
However, the liberal order seems to devolve into outright socialism, or at least into welfare statism, through the inexorable political economy of the democratic process. Both these later outgrowths of the liberal order always attack or erode property rights. Thus general time preferences should fall to a minimum as the liberal order triumphs over the feudal status society, but then rise again as the liberal order decays into socialism or the mixed economy.
The well-know problem of the commons can be described as a failure of institutional structure which imposes higher time preference on individuals. The free or below-cost provision of a public good results in individual users making more intensive use of the low cost public good. The fact that such highly intensive use causes perceptible degradation and shortening of the expected useful life of the public good, leads users to try and extract as much value added as possible from the public good, resulting in even more rapid and complete destruction of the public resource. Artificially imposing higher time preferences creates incentives for collectively undesirable behavior. The free rider problem results when provision of public goods is substituted for established customary security of property rights.
Subjectivity of Time Preference and Property Rights
The Austrian school's subjectivity and methodological individualism provide a distinctive view of time preference and property rights security. Because each individual is unique, each person may have a unique time preference, limiting the extent to which an overall rate of time preference can be defined. For an individual, time preference might be measured in the context of the individual's choice between two payments, a fixed payment offered today, and a variable payment offered in one year.
Time preference ensures the individual will prefer receiving payment today if the payments are equal, and that he or she must be offered a larger payment in the future to willingly forego the payment for one year. As larger and larger percent increases are added to the proposed future payment, the individual will eventually accept a sufficiently larger future payment in place of the present payment. The percent increase in the future payment, for which an individual is indifferent between the present and future payments, is the individual's rate of time preference.
Clearly this rate of time preference, as defined above, may be different for each individual, and almost certainly varies significantly across individuals. The common conjecture is that time preference is generally highest for the extremely young and the extremely old, but much lower for the middle-aged. Time preference is thought to be especially high for the poor, borrowers, and the young. A person just informed of a terminal illness, leaving them with very brief life expectancy, is presumed to experience an abrupt increase in time preference.
Also, a single individual may easily provide different answers when asked about the amount that must be added to small payments to render the chooser indifferent between present and future receipts, versus large payments. For example, the same person may require two dollars in one year to forgo a one dollar payment today, but only require one million one hundred thousand dollars in one year to forgo a million dollar payment today. Given the possibility of a magnitude-inconsistent response, can we say whether the individual's time preference is 100 % or 10 %?
For an individual who gives even slightly magnitude-inconsistent answers over a range of different payment sizes, the fairly simple and intuitive definition of time preference suggested above is thrown into considerable doubt. While the preceding proposed definition makes obvious intuitive sense, time preference measurement may be particularly difficult to operationalize, even at the individual level. It may be necessary to specify the size of the present payment when citing such measured time preferences. A further problem is that survey responses do not necessarily reflect actual behavior and thus can be misleading. Clearly, experimental economists can offer actual choices between small present and future payments, but not large ones.
In addition to the potential problem of magnitude-inconsistency, individuals may also exhibit time-inconsistency if the compounded annual percent increases they require to postpone payment either increase or decrease as the time period increases. This phenomenon would have profound implications for theories of term structure.
Even if it can be generally established that magnitude-inconsistency and time-inconsistency are not serious difficulties for most economic agents, the difficulty remains that each individual's time preference is a unique aspect of their character. The market interest rate prevailing in each credit market is reached through arbitrage among many individuals. On one side are individuals with high time preference, the borrowers who receive a consumer surplus equal to the maximum interest rate they would willingly pay, representing their time preference, minus the lower market interest rate they are required to pay. On the other side are individuals with low time preference, the lenders who receive a producer surplus equal to the market interest rate they receive from the borrowers, minus the minimum interest rate they would be willing to accept, their time preference.
The value individuals place on property rights is similarly idiosyncratic and individualistic. One person may value an object or a tract of land far more than its accepted market value and far more than anyone else. Since market exchange tends to move goods to the person who values them most highly, this state of affairs cannot be considered in any way exceptional. Anyone knowingly possessing goods which they can exchange for goods possessing, for them, a higher subjective use value, will necessarily do so (Menger 1871:228-230). One source of entrepreneurial opportunity comes from the fact that our knowledge of these opportunities for exchange is always limited.
Clearly, no respondent should ever knowingly accept a return below the best return available on the loanable funds market. Lenders compete to offer borrowers lower interest rates while borrowers compete to offer lenders higher interest rates, resulting in the substitution of an objective, exchange-value-determined, market interest rate, for the subjective, individual, rate of time preference. The prevalence of a market rate of interest must be counted among the other spontaneously-evolved institutions Menger (1883:155-159) cites.
The level of security afforded to the free exercise of one's property rights, may objectively vary among individuals. The law may discriminate among classes of citizens, often based on economic distinctions as well as racial, national, or religious ones. A landholder working a tract on the periphery of a settlement may objectively be more exposed to enemy attack or pillage than one whose land is more centrally located.
In addition to objective differences in property rights, there are also subjective differences. Different individuals attach different values to the same level of security of property rights. A socialist and a libertarian do not attach the same significance to the fact their property may be free from expropriation by the government, or theft by private criminals. The socialist might advocate expropriation, and celebrate if it happens. Generally, the level of security afforded to property rights in a particular society is valued differently by different individuals.
The kinds of property individuals choose as stores of value may influence, and in turn be influenced by, their rate of time preference. Individuals with high time preference are more likely to amass portable hoards of liquid cash, jewels, precious metals, and human capital, while those with lower time preference will hold more of their savings in land and illiquid, long-lived, physical capital. Once one's wealth is tied up in long-lived assets, one's time preference is likely to remain relatively low, until and unless the assets are destroyed or lost. Holders of highly liquid assets are freer to relocate in response to threats, but must remain vigilant to take advantage of this flexibility.
Government and the Right to Property
Individuals may expand wealth through production or plunder (Bastiat 1850) and thus have comparative advantage in either violence or production. Comparative advantage in violence may consist in nothing more than comparative disadvantage in production. These comparative advantages did not emerge until wealth began to accumulate. Individuals with comparative advantage in violence involve productive individuals in protection schemes, thus becoming the rulers of their primitive society. In this context, rulers often achieved legitimacy by confirming accepted rules of conduct, a process which facilitated cooperation in production and enhanced the ruler's wealth.
The ruler's time horizon will be longer, the more secure against competitive threats to his monopoly on violence. Thus enlightened, or at least educable, rulers realized early on they could both enhance the wealth-creating potential of the society they presided over, and maximize the security of their rule against internal and external threats, by enforcing secure property rights, and lowering taxation. In contrast, an insecure ruler with short time horizon will try to transfer wealth rapidly from subjects. The archetypal contrast is between the secure English King Henry II and his far less secure son John. Rulers face strong incentives to protect their own income, and their citizens' persons, productive activity, and property (Holcombe 1994:8-9). One reason why rulers are motivated to protect their citizens is because the rulers' income comes from taxation of the citizens.
Property accumulation can proceed unimpeded in the absence of any coercive power. Coercion and violence seem to be necessary outlets or professional occupations for those less admirable individuals with comparative disadvantage in production. Wealth seems desired generally for the direct satisfaction of individuals' wants, but also in a secondary manner, seems desired to elicit the admiration of others for the possessor. Thus individuals with comparative disadvantage in production are motivated to use their comparative advantage in violence to extract wealth from those with comparative advantage in wealth creation.
The comparative advantage in violence can be thought of a comparative advantage in wealth extraction. It seems best from the producers' perspective to be subject to no coercive power whatever. However, given the presence of some level of coercion, which seems to follow necessarily from the fact that some individuals must have comparative disadvantage in production and therefore comparative advantage in violence, producers must prefer coercion which protects their property, however imperfectly, to coercion which aims only at destroying it.
When a strong coercive power exists, economic success requires that property rights be recognized and supported by that power – that is the essence of a protection racket. State recognition of property rights is required to achieve the most efficient use of resources then, but only because the state is a threat to those rights. But if states did not exist, property rights still would. After all, property rights arise in customary law communities without state backing (Ellickson 1993; Bailey 1992; Benson 1991a, 1992, 1994a) (Benson 1999:153).
Means of employing violence and coercion seem to have evolved early on, which promoted the production and accumulation of wealth. Wealth producers benefit from the protection of the less productive providers of protection services, who receive their income as payment from the wealth producers under their protection. Coercive agents who extracted the most wealth immediately, leaving none for the future, quickly drove the societies they protected bankrupt. Unless they could spread their plunder in an ever-widening circle, they ultimately had to run out of individuals from which they could extract wealth.
Coercive agents, who allowed the wealth producers to retain the maximum proportion of the wealth they created, found the producers they protected created more wealth more rapidly, and the coercive agents enjoyed the growing surplus. They succeeded along with the society they protected and whose growth their lenient and liberal treatment encouraged.
In an environment where property rights are insecure, either due to high likelihood of government expropriation, or high risk of external conquest, individuals will have short time horizons and high time preference. Thus reputation and repeated-deal arrangements are less valuable, social sanctions such as ostracism are less effective, and acceptance and implementation of moral norms less pervasive. In this insecure environment "crimes," such as vigilantism, unlicensed gun possession, and construction of unlicensed castles, are often "undertaken to exercise social control" (Ellickson 1991:213; Acheson 1988; de Soto 1989).
Property Rights in More Advanced Societies
In more advanced societies, groups that gain political influence, for example, by gaining wealth or threatening political disruption, may persuade rulers to recognize their property claims. However, these groups often demand wealth transfers undermining others' property rights. As Benson (1999:152) observes, the "more secure the sovereign feels, the longer his time horizon tends to be, and this in turn implies more secure private property rights." This provides an incentive for cooperation and the basis for a symbiotic relationship between ruler and ruled (Holcombe 1994:171). Advanced societies exist in a tension between incentives to enforce property rights to enhance wealth creation and the sovereign's income, and conflicting incentives to extract rents from one group to support another. The groups that benefit from rent extraction contribute to maintaining the sovereign's security.
Market participants may support a coercive police authority because they seek to reduce transactions costs impeding coordination, or as a response to uncertainty. This leads to joint production of extortion, where victims of a protection scheme invite, accept, support, and legitimize the protection scheme, because it serves their actual needs. The Mafia simultaneously extorts wealth from victims, and promotes wealth creation by (a) protecting victims from outside threats and (b) enforcing their contracts (Gambetta 1993). When the government obtains a monopoly on protection service provision, citizens face incentives to engage in "political" means of wealth enhancement as opposed to "economic" means of wealth production through cooperation (Oppenheimer 1908). Market participants also compete to benefit from state's rent-extraction authority.
Homer and Sylla (1996:64, 136-143) document a characteristic U curve for interest rates over the course of a society's evolution and decay. Interest rates initially fall as a society becomes more secure and time preference falls. The golden age occurs in a "bowl" of low interest rates during which time preference is a minimum. When the society is in decline, either beset from internal or external sources of insecurity, time preference and interest rates both rise. In analyzing modern interest rates, Homer and Sylla note that there is no guarantee that the rise in interest rates attributable to social and moral degeneration must be irreversible.
The characteristic U curve can be observed in
Initially, interest rates fall as property rights become increasingly secure. This leads to complacency, which results in less intense attention to property rights security, causing the interest rate to increase. This may take the form of higher taxes, selective or general expropriation, or inflation. The decay of property rights seems to generally reach a crisis, after which taxes are lowered, expropriations discontinued, inflation lowered, etc., followed by a new round of increasing complacency.
Böhm-Bawerk suggested the cultural level of a nation is mirrored by its interest rates, and asserted that interest rates were inversely proportional to a people's intelligence and moral strength (Schumpeter 1951:182). This view fails to take account of policy-induced reductions in interest rates, spurred by expansionary monetary policy intended to stimulate investment and expenditure. Böhm-Bawerk (1959 II:97-101; III:196) also failed to recognize time as a productive resource, complementary to all other resources used to produce consumable goods. Kirzner (1996:6) distinguishes interest from a productivity return.
Inflation and Property Rights
Inflation is one means of expropriating wealth. In modern times it supercedes all other methods in importance. The higher the rate of inflation, the less secure property rights become. Thus, the higher the rate of inflation, the higher the rate of nominal interest, to the point where the real interest rate is often negative during periods of high inflation, because they are related by the following conventional definitions of the ex ante and ex post real interest rate, the Fisher (1896) equation:
(1) [ex ante real interest rate] r = n - p*exp
(1) [ex post real interest rate] r = n - p*
where r is the real interest rate, n is the observable nominal interest rate, and p* is the inflation rate or rate of change of the price level. p* cannot be observed before the fact, and the inflation premium built into a loan is thought to embody the lender's unobservable expectation of how much the price level will rise during the performance period of the loan. This is subjective in reality, as well as unique to each borrower. Furthermore, competition ensures that borrowers will seek to borrow first from those lenders charging the lowest inflation premia. Thus, it would seem arbitrage contributes much more to arriving at a single market interest rate, than any uniformity of expectations.
The higher the rate of inflation, the more the supply of loanable funds shifts to early maturities, and the more the demand shifts to longer maturities. Thus, the increased supply of short-term loanable funds lowers the price of short-term bonds but raises their yield. Similarly, the increased demand for long-term funds raises the price of long-term bonds and lowers their yield. This results in the inverted yield curve which is characteristic of periods of high inflation.
Time Preference and Interest Rates: the Pure Time Preference Theory
Carl Menger's radical subjectivism resulted in the
construction of a theory of interest which does not depend on objective
resource productivity. Menger
(1871:70) notes the uncertainty facing
the production process decreases with the progress of civilization. Kirzner (1996:134-154) calls this the pure
time preference theory (PTPT) of interest, which was subsequently developed by
Frank Fetter and Ludwig von Mises. As
Kirzner notes, the pure time preference theory played no role in the
A simple illustration will suffice to demonstrate why interest is attributable exclusively to time preference. Suppose a machine costs $100,000 and produces $10,000 value added each year. Suppose for simplicity that both the machine and the technology are infinitely-lived. Clearly this machine yields a perpetual 10% return, and that this 10% return is an objective characteristic of the machine and its operation in the production process, given the postulated price of $100,000. However, suppose the permanently prevailing market interest rate is only 3%. Then the machine should be more desirable, and its market price should be bid up. In fact, we can see that the market price of the machine should be bid up to the price that would reduce the perpetual return to 3%, namely $333,333.33.
Until the price of this machine is bid up to that level, opportunity for arbitrage persists. Thus, the objective productivity of capital or other resources, can play no role in determining the market interest rate, because of the role the objective productivity plays in determining the value of the object at a point in time. Only time preference and unrealized arbitrage opportunities, can relate values of goods across time periods. The market for capital equipment should be indistinguishable from the market for government bonds, which clearly perform no productive services.
Hayek's theory of production structure is occasionally criticized based on higher objective returns to some forms of capital, and that in any case higher returns should be sought by entrepreneurs. The interest rate which is proportional to the slope of the hypotenuse of the Hayekian triangle, it is objected, can only be a marginal interest rate. Most investment projects yield higher returns, because entrepreneurs rank prospective investment projects from those with the highest expected return, which are funded first, to those with the lowest expected return, which are funded last, and then only if the expected return at least matches the prevailing market interest rate at which funds can be borrowed to finance investment.
This objection, that objective returns can be higher than a prevailing market interest rate, seems to be answered by the arbitrage argument. If a resource yields a higher than market return, like a government bond, its value should be expected to be bid higher, thus lowering the yield.
Property Rights and the Term Structure of Interest Rates
Modern finance advances five theories of term structure, the relationship between average annual return and the time to maturity at any point in time (Thomas 1997:138-154; Van Horne 1998:83-100). These are the pure expectations theory, the liquidity premium theory, the segmented markets theory, the preferred habitat theory, and the Cox-Ingersoll-Ross (1985) theory. Each will be discussed in turn below, along with the implications of changes in time preference, which changes along with the security afforded to property rights.
(a) Pure Expectations Theory
The pure expectations theory (Fisher 1896; Lutz 1940) is based on four assumptions: 1. investors desire maximum returns over each relevant time horizon; 2. they regard various maturities as perfect substitutes; 3. transactions costs are zero or negligible; and 4. investors act on their expectations. Under these assumptions, the term structure of interest rates reflects only expectations about future returns. This term structure would be assured by arbitrage across maturities, assuming zero transactions costs.
In this kind of interest rate environment, any change in property rights security would change investors' time horizon. Higher time preference would result from less secure property rights. This would impose increased transactions costs. Thus, any loss of property rights security would increase long-term yields. This insight offers no testable hypothesis because the pure expectations theory does not predict any particular shape for the yield curve, and the modification to the pure expectations theory proposed here predicts a more steeply upward-sloping yield curve whenever time preference increases, but not any particular shape.
(b) Liquidity Premium Theory
The liquidity premium theory (Hicks 1946:146-147) is based on the insight that longer-term bonds entail greater market risk and therefore must offer a higher yield than a succession of rolled-over short term bonds with equivalent expected yields. Holders of longer-term bonds must be compensated for their loss of liquidity, and because they are exposed to market risk over a longer time period. This implies a more steeply ascending or less steeply descending yield curve than the pure expectations theory, but cannot provide a testable hypothesis.
Here, a loss of property rights implies greater market risk and transactions costs, and higher time preference would amplify more steeply ascending yield curve, but no hypothesis can be tested, because there is no definable reference yield curve predicted by the pure expectations theory, and because agents’ expectations are unobservable.
(c) Segmented Markets Theory
The segmented markets theory (Culbertson 1957) is based on the presumption that institutions and investors match maturities of assets with liabilities. It assumes little or no scope for substitution among maturities. Thus the U.S. Treasury should dominate the bond market and determine the yield curve. Loss of property rights security increases time preference, increasing demand for, and lowering the yield of, short-term bonds. This lowers the demand for long-term bonds, raising their yields. The segmented markets theory explains why the yield curve can be inverted or u-shaped. Again, the yield curve should be flatter the more secure are property rights.
(d) Preferred Habitat Theory
The preferred habitat theory (Modigliani and Sutch 1966) relaxes the segmented market assumption of no substitution among maturities. It assumes institutions and investors have strong preferences for particular maturities, but can be persuaded to stray out of their preferred maturity or habitat by sufficiently attractive yields on instruments of other maturities. An environment which would create an inverted or u-shaped yield curve under the assumptions of the segmented markets theory would, at most, create a less extreme configuration under the preferred habitat theory. Arbitrage among maturities which are not so much rigidly segmented but more realistically are preferred by savers and borrowers lessens the extreme differences among interest rates the loan market arrives at for different maturities. Once again, loss of property rights security increases time preference, raising demand for short-term bonds and lowering their yields, unless long-term bonds pay a sufficient premium. This significant difference between preferred habitat theory and the other theories of term structure suggests the possibility of a testable hypothesis.
(e) Cox-Ingersoll-Ross (CIR) Theory
Cox, Ingersoll, and Ross (1985) build a stochastic calculus model of a continuous-time competitive economy in which individuals maximize the utility expected from consuming a single good. The representative agent chooses the optimal level of consumption, the optimal level of savings to be invested in production, and the optimal level of saving to be invested in government bonds. The representative agent can also invest remaining savings at a riskless short-term interest rate or borrow at the same rate.
Changing the rate of time preference by changing the level of property rights security seems to have the same impact of rotating the yield curve. In the CIR model, bond prices are an increasing function of the covariance of the interest rate with wealth. If this covariance is high, bond prices tend to rise (since interest rates fall) when wealth falls, and tend to fall (since interest rates rise) when wealth rises. The representative agent wants to hold bonds because they offer some protection from market uncertainty. Property rights security would impact the kind and extent of uncertainty to which agents are exposed; more secure property rights would reduce uncertainty, lessening the advantage of holding bonds.
The CIR model also yields the result that bond prices are an increasing concave function of interest rate variance. If a higher interest rate variance reflects greater uncertainty, risk-averse investors would tend to value bonds more highly the more uncertain the environment they face.
Because the first four theories of term structure successively build on one another, the fact that each can be reconciled with strong linkages between time preference and property rights. The Cox-Ingersoll-Ross theory inhabits a different level of mathematical formalism, and offers stronger implications about the interest rate environment, but appears consistent with the general conclusion that the less secure are property rights, the higher are interest rates generally, and the steeper is the yield curve.
There is no necessary requirement that actual individuals' time preferences be either magnitude-consistent or time-consistent, or that they be equal between two individuals. Market interest rates result from arbitrage between high time preference individuals who desire to borrow and are willing to pay relatively higher rates of interest, and low time preference individuals who are willing to lend and will accept relatively low rates. Individuals' time-inconsistency must play a role in determining different interest rates for different maturities, as in the segmented markets theory of term structure. However, much like the preferred habitat theory, individuals must be expected to stray from their preferred maturity if other maturities offer more attractive interest rates – either sufficiently lower for borrowers, or sufficiently higher for lenders. Arbitrage tends to minimize differences in interest rates for different maturities.
Though time preference is necessarily subjective, it should be influenced by external factors such as property rights security. Any decrease in security of property rights, should raise time preference, perhaps most dramatically in those who own the most property, or in the case of discriminatory legislation, those whose property rights are systematically degraded. This should be observed in an increase in interest rates, as those whose time preference has increased should seek to borrow more and lend less, driving up prevailing market rates. Any improvement in property rights security, should be observed in a lowering of interest rates, as those whose time preference has gone down, should seek to borrow less and save more, lowering the market rate.
In contrast to the formerly ascendant Marxian view which associated collective ownership with a higher state of civilization, the enhancement of property rights proceeds with the evolution of civilization and government. As individuals come to value and recognize property rights, they become free to implement more productive, roundabout, capital-using production methods. Roundabout means of production cannot be relied on in the absence of secure property rights.
However, once capital-using society evolves to a state where
the government becomes dominated by self-seeking bureaucrats and politicians,
the liberal order seems to inevitably break apart into competing interest
groups seeking to monopolize the government's seemingly unlimited
rent-extraction authority. The liberal
order evolves through the inexorable political economy of the democratic
process into outright socialism, or at least into welfare statism. These two decadent forms of liberalism
mistakenly attack private property, failing to recognize that private property
is a necessary precondition for the liberal order. Thus general time preferences should fall to
a minimum as the liberal order triumphs over the feudal status society, but
then rise again as the liberal order decays into socialism or the mixed
economy. In a sufficiently advanced and
complex society, the interest rate moves in a cyclical pattern tracing the ebb
and flow of higher and lower time preference and more or less secure property
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 In this example, the return on capital before arbitrage is 3.33 times the market interest rate. Since the value of the capital is the present value of the income stream it provides, arbitrage opportunities persist until the price of the capital is bid up by the same multiple, 3.33.