Property Rights Theory :

In the context of legal environment obtaining for promoting smooth economic transaction, NIE has been particularly interested in the economic effects of property laws. Eggertsson (1990) notes that the cost of enforcing property rights and monitoring citizen's activities being extremely high, it is the State which has the economies of scale in the enforcement of property rights. This is despite the fact that there is no guarantee that the structure of property rights defined by the State is necessarily consistent with rapid economic growth. In practice, a system of property rights is defined according to the community's political structure prevailing in a society. The stock of knowledge and the endowment of resources define the technical upper limits for productivity and output. The firms which minimize transaction costs and maximize output determine the structural production frontier. Some political systems create incentives that bring the structural production frontier close to the optimum technological frontier. The joint effects of information asymmetries and the role of transaction costs, generate a propensity for States to create a structure of property rights suitable to the political structure prevailing. A credible commitment by the State to stable property rights helps in promoting investments and lower the transaction costs. However, there is a tendency for the States to generate inefficient property rights owing to continuous tensions between the ownership structures to maximize income.

Although efficient property rights reduce transaction costs and promote growth: there is a utility rnaximising rule by which the State trades services (protection and justice) for revenues (taxes). the State therefore behaves as a 'discriminating monopoly' devising specific sets of property rights for each set of constituents in such a way that the State is able to maximize its revenue. According to North, the State has two basic constraints to contend with. One, to avoid offending powerful constituents (competitive constraint) and, two, the transaction-costs constraint itself by which the collection of revenues is affected by the structure of property rights. The necessity of a theory of ideology therefore arises from the contradiction that the State faces. On the one hand, the State specifies rules that maximize the income and, on the other, the State needs to devise rules that lower transaction costs to enhance growth.

To achieve this, it is necessary to have a set of ideological conviction that constrains individual behavior. Otherwise, the transaction costs of compliance, monitoring and enforcement will be very high. The overall cost of coordinating and integrating the various economic agents entail, therefore, an economy-wide restructuring including the development of a polity that will enact and enforce the rules of transaction necessary to the required integration. 'The implication is that the State can never be treated as an exogenous actor in development policy with its obligations to device a set of property rights and enforcement to create competitive market conditions. The thrust of development policy must therefore be the creation of polities that will create and enforce efficient property rights.