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The burden of non-transferable property rights

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The burden of non-transferable property rights

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The burden of non-transferable property rights: Can’t sell, can’t collateralise, can’t develop

Property rights to land are a cornerstone of economic development. Yet, they are often incomplete in practice. For many landowners, especially among already disadvantaged groups, land rights frequently entail only usufruct rights (‘use and enjoy’) and exclusion rights (i.e. the right to fence in your property), but exclude the ability to sell or transfer these rights (Rose-Ackerman 1985, Ellickson 1993, Alston et al. 2018).

There are, for example, many cases in Latin America and sub-Saharan Africa where tenants have non-transferable usufruct property rights (Migot-Adholla et al. 1991, Goldstein and Udry 2008, De Janvry et al. 2015).  This phenomenon also persists de facto in the rural US South, where one-half of all Black-owned land is tied up in so-called heir’s property (Emergency Land Fund 1980).  Finally, large swathes of Native American owned land in the US have a tenure that grants usufruct-only property rights. In a new study (Dippel et al. 2020), we provide an empirical analysis of the consequences of excluding transfer rights from the bundle of property rights over land.

The study leverages a natural experiment: Between 1887 and 1934, the US government allotted millions of acres of previously tribe-owned land to individual Native American households under the authority of the Dawes and Burke Acts. Indian allotments were first placed into the trusteeship of local agents from the Bureau of Indian Affairs (BIA). Following a stipulated period of trusteeship, the local BIA agents had the authority to convert allottees’ land into fee simple (full property rights) once they deemed the allottees “competent”. Had the policy run its course, all reservations would have eventually been allotted, and all allottees would have eventually obtained their lands in fee simple. The policy did not, however, run its course. In 1934, the Indian Reorganization Act (IRA) put a sudden stop to the policy of Indian allotment and froze all allotted-trust land into trusteeship indefinitely, creating a patchwork of land tenures that persists on Native American reservations to the present day.

The Native American owners of allotments that were converted into fee simple have full property rights over their land, and are thus unconstrained in their ability to collateralise and develop it. In contrast, Native American owners of non-transferable allotted-trust land cannot collateralise it with a bank (Anderson and Parker 2008, Brown et al. 2017, Feir and Cattaneo 2020). What is more, allotted-trust status historically entailed a lack of control over testation, which over time created highly fractionated ownership claims among many heirs: A 1987 Supreme Court report discusses “tract 1305 (on the Sisseton-Wahpeton Lake Traverse Sioux reservation) [which] has 439 owners, one-third of whom receive less than $.05 in annual rent” (Shoemaker 2003). These highly fractionated claims create exorbitant transaction costs for the productive use of allotted-trust land today (Russ and Stratmann 2014).

Figure 1

The burden of non-transferable property rights 2

The consequences are illustrated in Figure 1, which shows two neighbouring allotments on the Northern Cheyenne reservation in Montana, where one of authors of this paper is an enrolled tribal member whose grandparents were allottees. The allotment on the left was converted into fee-simple before 1934, the one on the right stayed in allotted trust. The allotment on the left is actively farmed, and the structures on the land (residence plus farm buildings) are well-maintained. The allotment on the right is not farmed: The land, of identical quality, lies fallow, while the property is littered with abandoned cars and decrepit structures. 

To investigate the consequences of transfer rights limitations more rigorously, current satellite imagery is used on agricultural production and land development to compare allotted-trust lands to fee simple lands on Native American reservations. Figure 2 depicts the outcome data, with each square identifying one quarter-section land allotments with a unique land tenure.

Figure 2

The burden of non-transferable property rights 3

To obtain an apples-to-apples comparison, the study compares land only within increasingly smaller spatial neighbourhoods ranging from six square miles to one square mile (15.5 km2 to 2.6 km2). With four or one square miles (10.4 km2 to 2.6 km2), comparisons are made only within respectively four or 16 land allotments, and in each case observed immutable land characteristics become fully balanced across tenure types.

Figure 3 shows how the scale of quarter-section allotments relates to the scale of reservations, using the case of Pine Ridge Reservation, South Dakota.

Figure 3

The burden of non-transferable property rights 4

Using this comparison, fee-simple property rights increase land use by between 0.2 and 0.4 standard deviations. This decomposes into a 20% higher share of land under development and a 35% higher share of land under cultivation, conditional on identical location and land characteristics.

To establish that these differences are causal, an instrumental variable (IV) strategy is pursued, which uses an allotment’s issuance year and the identity of exogenously rotating BIA agents on reservations a century ago to predict whether an allotment was converted to fee-simple title.

In order to address a remaining concern about whether the original allottees’ actions and characteristics could have impacted the local BIA agents’ historical decision to deem the allottee “competent” and convert the land to fee simple, and whether these same actions or characteristics could have had some independent long-run effects on development, the authors utilise an IV strategy based on (a) the allottees’ age, and (b) the exogenous rotation of BIA agents across reservations over time.

The logic of the IV strategy rests on (a) the fact that allotments to younger allottees were issued later and had not passed a sufficient trust period before the 1934 IRA ended the land conversion process, and (b) the fact that different BIA agents exhibited very different revealed propensities for converting land to fee simple. Using this IV strategy, the authors confirm the baseline results that fee-simple property rights increase land use by between 0.2 and 0.4 standard deviations. 

Allotted-trust land suffers from the twin problems of getting fractionated into a multitude of ownership claims and of not being collateralizable. Additional data sources allow us to unpack these two mechanisms by separately measuring access to credit and the extent of fractionation at the reservation level.  Both problems appear to be separately at work in impairing economic development on reservations in roughly equal measure.

Figure 4

The burden of non-transferable property rights 5

To gauge the economic consequences of all this in dollar terms, we use county-assessor data on land values around reservations from three states where these data are available (see Figure 4) to provide a back-of-the-envelope calculation of the value of land that has been foregone by keeping land in allotted trust rather than converting it to fee simple title with full property rights.  Our estimates suggest that the (counter-factual) value of an allotment in trust (which cannot be sold and thus has no observable market value) is between $150,000 and $700,000 less than the value of a 160-acre allotment held in fee, with the range reflecting differences in surrounding land values.

Tribally Owned Lands

While our causal estimation is focused on the comparison of two types of land tenures for individually held Native American land, we also investigate land use efficiency of communally owned tribal lands, which still constitute the majority of all Native American lands today. We find that tribal lands sit between the two individual land tenures in terms of land use efficiency: Tribal lands are less efficiently used than individual fee simple land, but more efficiently used than allotted-trust land.

What should be done to address the problem of allotted-trust land on reservations? 

Full fee-simple property rights clearly lead to the most efficient use of land. Converting all allotted-trust lands into fee simple would in a sense ‘see through’ the policy of Indian Allotment that was suddenly stopped in 1934. However, an important countervailing consideration is that reservation land is more than just an asset of individual Native Americans; it is also the land base of Native American tribes and communities (Treuer 2012, 2019). This creates trade-offs in the choice between converting allotted-trust lands to more complete private fee-simple rights or ‘reverting it back’ to more tribal control. 

Clearly, either option would be preferable to allotted-trust. Also clearly, the choice between these alternatives belongs to the individual tribes and not the federal government.

There is a historical precedent that suggests the choice need not be binary: During Mexico’s second land reform (Procede) from 1993–2006, indigenous farmers were given full title to the land that they had possessed usufruct rights to since the 1930s. Communities (ejido) then separately decided collectively whether these rights would be transferable only within the ejido, or whether land could also be transferred to non-ejidatarios (De Janvry et al. 2015). We view this as a workable template for resolving the land tenure conflicts on Native American reservations.

References

Alston, E, L J Alston, B Mueller and T Nonnenmacher (2018), Institutional and organizational analysis: concepts and applications, Cambridge University Press.

Anderson, T L and D P Parker (2008), “Sovereignty, credible commitments, and economic prosperity on American Indian reservations”, The Journal of Law and Economics 51(4): 641–666.

Brown, J R, J A Cookson and R Z Heimer (2017), “Law and finance matter: Lessons from externally imposed courts”, The Review of Financial Studies, 30(3): 1019–1051

De Janvry, A, K Emerick, M Gonzalez-Navarro and E Sadoulet (2015), “Delinking land rights from land use: Certification and migration in Mexico”, American Economic Review, 105(10): 3125–49.

Dippel, C, D Frye and B Leonard (2020), “Property Rights without Transfer Rights: A Study of Indian Land Allotments”, NBER working paper #27479.

Ellickson, R C (1993), “Property in land”, Yale Law Journal: 1315–1400.

Emergency Land Fund (1980), “The impact of heir property on black rural land tenure in the southeastern region of the United States”, The Emergency Land Fund.

Feir, D and L Cattaneo (2020), “The price of mortgage financing for Native Americans”, Journal of Race, Economics, and Policy, forthcoming.

Goldstein, M and C Udry (2008), “The profits of power: Land rights and agricultural investment in Ghana”, Journal of Political Economy, 116(6): 981–1022.

Migot-Adholla, S, P Hazell, B Blarel and F Place (1991), “Indigenous land rights systems in sub-Saharan Africa: a constraint on productivity?”, The World Bank Economic Review, 5(1): 155–175.

Rose-Ackerman, S (1985), “Inalienability and the theory of property rights”, Columbia Law Review, 85(5): 931–969.

Russ, J and T Stratmann (2014), “Creeping normalcy: Fractionation of Indian land ownership”, CESifo Working Paper No. 4607.

Shoemaker, J A (2003), “Like snow in the spring time: Allotment, fractionation, and the Indian land tenure problem”, Wisconsin Law Review: 729.

Treuer, D (2012), Rez Life: An Indian’s Journey Through Reservation Life, Grove/Atlantic, Inc.

Treuer, D (2019), The Heartbeat of Wounded Knee: Native America from 1890 to the Present, Riverhead Books.

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