Security, risk and registration

I.,ml Uve I'oliKv. Vol. 15. No. I. pp. 83-94. It~X

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Security, risk and registration

David Palmer Most property owners in poor countries lack the secure property rights consldered necessary for growth. Titling and registraUon projects are often expensive, and governments face the dllemma of whether security can be provided for less cost while not threatening exlsting formal rlghts. People may acquire security from several sources. In part, their acceptance and use of a registration system depends on the extent to whlch registration adds to the total security they enjoy, and the effect it has on their strategies to manage risk. © 1998 Elsevier Science Lid. All rights reserved

Keywords: titling and registration; land administration ment.

systems;

risk

assess-

David Palmer is a private consultant. His address is: PO Box 15346, Gainesville, FL 32604, USA.

Confidence in property and contract rights is a long-held tenet of adw)cates of market-oriented democracies (McLaughlin and Palmer, 1996). Such confidence, it is argued, is instrumental in fostering economic, social, and political development. A doctrine of secure property rights rests on several beliefs. First, economic development is stimulated when people can easily defend their rights against the claims of others. This gives owners the contidcncc that they will benefit from investments such as improving their homes or taking land conservation measures. Secure property rights also give creditors the confidence to loan money, providing owners with financial resources nccdcd to make the improvements. As owners build better homes, property values rise. At some stage it becomes cost effective for governments to implement property assessment and taxation systems. The increased tax base allows governments to fund improvements such as paved roads, street lighting, and sewerage systems that assist in further raising property values. Some owners may use their property rights as collateral for loans to start new businesses or expand existing ones, thus providing new jobs and increasing the tax base. Others may take advantage of an open market that allows them to move from their land to benefit from opportunities offered elsewhere. Second, secure property rights foster social stability, again because those rights can bc easily defended. Clearly defined rights may prevent some property disputes from arising, and may help I O resolve others more quickly. Secure property rights in the form of home ownership may bc associated with civil order. Third, secure property rights encourage good governance. Land, as sovereign territory, connects people to governments. On the one hand, information about the land and holders of property rights allows government agencies to manage resources more sensibly, and to enforce environmental and social regulations more effectively. On the other hand, secure property rights help turn subjects into citizens. From the Lockcan perspective, property is the key to creating a government based on consent. Land administration systems in rich countries provide confidence that property rights will bc easy to identify and verify, that rights will bc protected against unlawful actions, and that results of legal actions will bc easy to predict. When it comes to property transactions, registration systems play a role in bringing certainty. By acting as int'ormation systems, property registries reduce asymmetry of information between parties in a transaction. But registration systems arc more than just information repositories. Property rights, as opposed to mere possession, are enforceable

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Securi(~: ri~k and re.qi.~trati,n."D. Pahm'r

claims. Registration systems also bring with them an clement ¢5t"protection to those who hold registered rights. In poor countries, flsrmal land administration systems usually cater only to an elite minority. Titling and registration is expensive and timeconsuming, beyond the resources of the majority of the population who hold rights informally, i.e. their rights lack explicit acknowledgment by the state, as well as legal protection. Governments face the dilemma of how to increase security t¢5 those in the informal sector while not diminishing the security enjoyed by those already in the formal sector. One option is to differentiate between different levels of title: holding fixed the existing set of procedures that give fully marketable titles, and introducing new sets of procedures that give titles of lesser security but are more affordable. Another option is to hokt fixed the security needed fisr fully marketable titles but to lower the costs of acquiring them by modifying the set of procedures. This paper analyzes the effects of these two options for providing security from a risk management perspective. It is based in part on Palmer (1996). The paper begins with a review of demands for security and how people obtain security in general, and discusses the trade-otis faced when attempting to provide tk~rmal security.

Security and risk management D e m a n d s . / h r security

Demands ti~r security, even within an informal community, are not homogeneous. Although these demands may form a continuum in practice, fi~r convenience they can be categorized as 'basic" demands and "expanded' demands, i.e. those necessitated by expanded markets. Basic demands are driven by a need for assurances that residents will not be evicted, or at least will receive some form of compensation if eviction occurs. By meeting this need, residents of a community are provided with a longer-term time horizon, giving them an assurance that they will benefit from investments such as improving their homes to protect against the elements, both weather and criminal. Another need is for assurance that children will inherit property rights. Increasing investment in homes may stimulate demands for those homes to stay in the family. These basic demands exist in market economies; they also occur in reciprocity transaction modes where transactions are based on kinship and other associations. Expanded demands arise when asymmetry of information exists between parties in a transaction, and when there is uncertainty regarding protection of rights--the hallmark of a market economy. Risks associated with imperfect information and protection are heightened in informal markets. Several problems can be identified (Hoff and Stiglitz, 1993). Screening problem. It is costly to determine the extent of risks faced by each party in a transaction. Screening costs are increased by moral hazard, since any source of information must also be screened for reliability. Incentives problem. It is costly to ensure that each party in a transaction honors all conditions of the deal. Enforcement problem. It is costly to compel parties to adhere to the agreement. The problems of screening, incentives, and enfisrcement are, to some extent, interlinked. In relatively closed markets (i.e. those segmented along geographic lines and kinship groups), information tends to bc symmetric.

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Security ri.sk und rcRi~tnttl~sn." D. Palmer

and local community and kinship sanctions act as mechanisms to enforce contracts. As a result, trust is relatively high. But, from an economic perspective, the volume of transactions is low, since trade occurs only between partners who are well known to each other. As markets expand, outsiders play an increasingly larger role and there is a commensurate increase in uncertainty and distrust that must bc dealt with, directly or indirectly, through screening, incentives, and enforcement.

Soun:es of proper(v r(t,,hts A person may acquire security from a number of sources. First, the community provides security when neighbors recognize and protect a person's property. In rich countries, recognition by the community of a person's rights in land often revolves around whether neighbors accept a common boundary, but may bc more complex, for example the adoption of informal rules for settling disputes that arise from property damage caused by straying cattle (Ellickson, 1991). In poor countries, people often gain property rights through membership in social communities. In "customary" rural tenure systems, maintaining property rights validates membership in a group just as much as membership facilitates the acquisition of property (Berry, 1989). Informal urban settlements may also exhibit strong communal solidarity, especially when community organizations administer the initial allocation of parcels and subsequent transfer of properly (de Soto. 1989). Second, the polity may provide some security. In rich countries, governmerits tend to accept a person's right to possess specilic property, with dispossession occurring through expropriation to serve some public good, or seizure as penalty. In poor countries, governments may recognize the rights of informal settlements, rather than individuals, t~ not be evicted. Initially, governments may respond to the creation of informal settlements by attempting to forcibly remove residents. When settlements achieve a 'critical mass', governments arc forced to concede their permanence. Third, the formal legal system may offer some security. A person's security of property rights may increase when those rights arc protected by the legal system. Fourth, coercive organizations beyond the political-legal state and the community may provide a person with security. Such organizations may take many forms, but can be characterized as coercive structures that emerge in response to market failure and the absence of a strong state, in particular when property rights and contracts arc not enforced by any legitimate body. The resulting high degree of distrust generates a demand for guarantees on both sides of transactions (Gambctta, 1993). Coercive organizations may take the form of criminal elements, such as the Russian "mafiya', or political revolutionary groups, like Peru's Scndero I,uminoso, that embark on struggles for control of informal settlements. The total security enjoyed by a person may be regarded as the calculus of security provided by all sources, e.g. community, polity, legal system, and coercive organizations. In rich countries, security is usually high since the community, polity, and legal system all offer high security, and since the existence of a strong state minimizes or eliminates the role of coercive organizations. Because of a strong rule of law, security is perhaps viewed exclusively as legal security. In poor countries, security may be low for a number of reasons. Inadequate state capacity may result in the emergence of inefficiency-promoting coercive organizations that, in turn, may prevent the development of strong communities and legal systems. Beyond this, security from one or ~5

Security risk and registration: D. I'ahncr

more sources may be limited or non-existent" examples of this include the following. A settlement with high community security may have low political and legal security. A typical case may be a cohesive informal settlement, situated on vacant state land, which is threatened with eviction by the government. A settlement with high community and political security may have low legal security. An example is when a government concedes that it will not evict an informal settlement. Clientalism or paternalism can lead governments at times k~ tolerate, or even encourage, settlemcnts. Failure to give legal security emphasizes the requirement fl~r political loyalty on behalf of the communities. A settlement with high community and legal security may have low political security. For example, titled owners may be forcibly resettled by the state for political reasons. While all legally held hind is subject to the sovereign powers of eminent domain, in these cases accepted practices of "due process" are subverted for political ends. An owner with high political and legal security may have low community security, f o r example, family and neighbors of a loan defaulter may threaten, or even physically prevent, a new purchaser from taking occupation of the parcel. The relationship between sources of security may be potentially complex. In many cases, increasing security from one or more sources will result in an increase in total security. But, in some cases, an increase in one source may result in no change, or even in a decrease, in total security. An obvious example is an increase in security given by coercive organizations, since this will decrease the level of security receivcd from other sources. Somewhat less obvious is the possibility that an increase in security affl~rded by the legal system may result in a decrease in total security. For example, titling and registration projects can reduce security enjoyed by many rural residents when claims of subordinate rights-holders (often women and the poor) to a parcel are concentrated in the hands of one individual (Atwood. 1990). Risk management In practice, security can never be absolute. It can never be measured directly because it cannot be defined objectively. To a large extent, security is what people perceive it to be. Substantial security may be obtained by reducing ambiguity using extreme measures, for example physically defining all boundaries with indestructible material, llowever, the doctrine of diminishing returns indicates that at some stage the gains in additional security will be too small to warrant the cost of additional action. Since security is an economic good. it is affectcd by supply and demand. As security decreases, uncertainty and risk of loss increase. A variety of risk management techniques may be used to raise the level of certainty. These include: @ avoidance of actions that give rise to risk of loss: • rcduclion of the frequency of losses occurring, and reduction of the magnitude of losses should they occur; • transference of risks either by distributing them through insurancc pools or shifting them directly to others: • volunta~ retention of risks.

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These techniques have costs associated with them. In most cases, the cost of escaping a loss should not exceed thc cost of the loss itself. Consequently, risk management focuses on optimizing the total cost associated with risk, i.e. reducing the sum of thc cost of expectcd losses and thc cost of lessening exposure to risk. Formal land administration provides a set of measures to facilitate transactions when uncertainty exists. A prospective buyer or lender can address the screening problem by shifting some risk to the state (through the public registry), property professionals (such as lawyers and surveyors), and othcr commercial organizations (such as insurance companies). An owner or Icndcr can reduce risk by registering rights in the public registry (for example, tO gain priority over competing unregistered rights or even to gain some form of guarantee and indcmnity). Also, the holder of registcred rights may havc recourse to thc courts to enforce those claims. In poor countries, where Icgal security is low, people may seek a strategy of risk optimization by employing the full set of measures available, and not just the subsct of legal measures. Thus, if thc marginal cOStS of legal security rise above the perceived marginal bcncfits, a person may settle for a different level of security by replacing existing security measures with more cost-effective ones. As costs u[ legal security rise, a transfer from a registered owner to a new purchaser may not be entered in the registry and the property rights become informal. The owner then relics on informal security measures (e.g. thc support of the community) to protect the rights. When this occurs, the value of information registered dcclines, and problems of information asymmetry increase. I-)iscrepancies between registered information and the reality of ownership on the ground create ambiguities to be exploited as part of the risk management strategies of others.

Trade-offs in providing formal security Efforts of governments of poor countries to provide informal residents with the benetits of fl~rmal property may be hampered because of a lack of capacity in several areas, including the following. • Planning and devclopment. Rural formalization projects may require the consolidation of fragmentcd farms before farmers are titled and registered. In urban informal settlements, there may be a need to realign and widcn streets and to design anti build utility services in designatcd corridors. • Certification of parcels. Settlement boundaries and those of individual parcels must bc identified before titles can be registered. • Certification of ownership. Claims of people to individual parcels must be researched and validated, and titles must bc issued. • Registration. Instruments identifying parcels and holders of rights must be examined and rcgistered. • Shortages of appropriately qualified surveyors, lawyers, and officials in titling agencies and registry offices may delay the process. The cost of providing formal security is the cost of following a prcscribcd set of procedures for planning and dcvclopment, certification of parcels and ownership, and rcgistration, it may be argucd that the economic and social advantages of formal ownership are so considerable that rapid and large-scale formalization makes sense. However, these advantages must be weighed against the substantial costs of formalization

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Security risk atul re,~islration." I). Palmer

(duc to following the set of procedures) when large numbers of parcels arc involved. To what extent can costs be reduced? Reducing standards of formalization procedures can lower some costs. Reducing standards may take many forms, one of which is deregulation of work. For example, legal and surveying roles may bc opened to technicians who were previously excluded from restricted property professions. Some titling and registration activities performed by the public sector may bc contracted out to the private sector. Standards detining time requirements may also bc reduced, for example the period specified to acquire ownership through adverse possession or to search back legal documents to trace ownership. Reducing inefficiencies and eliminating unnecessary requirements of registration systems can also reduce costs. Systems have invariably evolved in a piece-meal fashion. Often. rules and procedures are inappropriate, originating at times merely to serve the interests of protected minorities such as property professionals. These inefficiencies mean that not all the costs associated with an existing set of procedures result in benefits. l)iffcrcnt rules may provide the same security tk~r less cost (or conversely, more security fi~r the same cost). For example, replacing judicial mechanisms with administrative ones may reduce some costs. In other cases, costs may be avoided by dispensing with unnecessary requirements. Thus. spending less on process does not necessarily mean less fairness for the population at large. It perhaps does mean that those who benefited from inefficiencies face reduced earnings per transaction in the new system. The following sections discuss the effects of strategies to reduce costs of acquiring legal security from a risk management perspective.

I n t r o d u c i n g new security products A government wishing to formalize property rights of the majority of citizens, but lacking the resources to do so, may consider reducing the standards set for titling and registration. If those already holding formal rights, along with property professionals and creditors, object to attempts to reduce security already in place, it may bc necessa~ to design a registration system capable of differentiating the product of security. To what extent can the supply of security be differentiated? As a theoretical example, picture that on a scale measuring security from 0 to 10. a minority of the population enjoy a security level of 10 (representing fl~rmal legal security) and the majority have only infi~rmal security, say at level 3. If existing fl)rmal standards arc too costly to apply to the whole population, is it feasible to give those holding informal property rights greater security, say at level 7, provided it can bc done at a reasonable cost? In other words, can a graduated system of titles be implemented whereby a property holder can move to a higher level of security when he or she is able to pay tot the associated costs? Figure I illustrates one scenario of different levels of fi~rmal security. Here, ownership may bc transformed from informal (I) to one of three

I

F2 Figure 1.

88

~ F3

.S

Securi(~; tJsk and regi,~truti~m" D. Palmer

grades of formal ownership (FI, F2, and F3), each grade having its own level of sccurity. Ownership of type FI accommodates "basic" necds but with limitations on formal recognition of ownership. Type F3 represents existing formal ownership with its "expanded" necds; type F2 may exist as a transition step. As the figurc indicates, it may be possible to go from limited security (F1) to the highest level of formal ownership (F3) either directly or via some intermediate level (F2), depending on requirements and resources available at the time, While it is possible to diffcrentiate between levels of formal security offered, to what extent is it desirablc to do so? Differcntiation may be required because of limitations in the supply of security. For example, a poor country may lack the resources to transform informal ownership (I) directly to conventional formal owncrship (typc F3). Providing a lesser form of formal ownership (type F1 ) makes sense only if considerable time elapses bctween the rccognition of type FI ownership and its transformation to a higher level (F2 or F3). Below some time threshold, the costs of a two-step transformation (e.g. I to FI to F3) may exceed the costs of a single transformation (e.g. I to F3). Differentiation may bc required because of differing demands: because security is an economic good, its demand may change according to its cost. Thosc unable to pay the cost of complete Icgal security may be willing to settle for something less. I lowever, many important benefits of formal property (e.g. credit) come only with fully marketable titles. Increasing the numbers of fully marketable titles provides grealcr incentives for creditors and others to change the way in which thcy do business. To what extent is there a need for differentiation in what constitutes fully marketable title'? Using the example above, owncrship of types F2 and F3 both accommodale "expanded" needs: a person holding either type of ownership may be able to obtain credit secured against ownership rights. If type F2 has lower standards for identifying parcels and ownership (for example by using technicians rather than property professionals), then a creditor may consider type F2 to be riskier than type F3, and so offer credil on more onerous terms. Graduation of title has value if a creditor can rationally determine the differenccs in risk; otherwise, differentiation may not add value. It is, perhaps, more likely that creditors accustomed to dealing with an existing formal system (e.g. one that registers only ownership of type F3) will have difficulty assessing risks associated with a new type of ownership (type F2) with diffcrent standards of certification. This will be especially so if formal lenders such as banks base their risk assessment on the input of the surveying and legal professions who certify the existing type F3 ownership. These professions may provide the banks with valid concerns regarding the effect of reduced standards. Alternatively. the input may be biased by attcmpts to maintain professional monopolies. There is another reason for a cautious approach to providing different levels of formal security. Formalization projects that result in something less than full title may be seen as acts of continuing discrimination against the informal sector.

Introducing new security procedures The discussion of the previous section adopted the assumption that maintaining existing sets of procedures is essential if standards arc not going to slip. To what extent is this assumption valid? How well do existing formal registries manage risk? Some provide minimal security, or even create further uncertainties; others arc more effective. Moreovcr, the cost 89

,$'e~mJt~. ri~k ~tnd re,~tslr~tliott." I~. P~tbter

at which registration systems provide security varies considerably. To he successful, a registration system must address risks associated with imperfect information and protection. Information mechanisms are required to reduce the frequency of risks occurring, and protection mechanisms are needed to reduce the severity of risks that do arise.

h!/'ormaliolr medzanJsms ~/" securJO' One objective of a registration system is to provide security by reducing information asymmetry between parties in a transaction. To this end, a registration system is an information system focusing on three elements: the ol~ject of the right, the nature of the right in the object, and the holder of the right. There is considerable latitude regarding what may and must be registered (e.g. registerable rights and unregistcrcd overriding rights, w~luntary consensual registrations and inw~lunta~ court orders, etc.). There arc choices regarding the level of precision used to idcntit~' rights, holders, and objects. For example, a regist~ may register a document relating to a secured loan or it may mcrely register notice that the lender may have a sccurity intcrcst in the collater~d, and that addititmal inform~ttion should be acquired from the parties themselves. Finally, there arc choices regarding the publicity of registered inform~ltion (e.g. location and, when available, format, and fces). From a security perspective, registered inbrmation must bc suflicient to reduce risks faced by owners and lenders. Additional information beyond that minimum has no value for risk management. (()f course, a registration system may include other infi~rmation that provides value for public administration, etc.) Infi)rmation nceded to reduce asymmet~' should hc determined. For example, registry searches should reveal pending applications for registration of transactions, as well as those already registered, so that Icnders and purchasers can determine the status of property rights with ~l desired level of certainty. Standards for infi~rmation should I~c reappraised to dcterminc what is sufticient. For example, standards b r time requirements va~, considerably even in rich countries of similar heritage: in ('anad'd, New Brunswick requires that title he searched back 60years, whereas Ontario h~ls a 40ycar requirement, and in England, a 15 ye~lr period is stipulated. Registered information must also I~e ~t the ~lppropriate quality to rnanage risk. ('ertitication of documents represcnts one wav of controlling quality. It is possible for a registration system to hCwe no substantive controls on incoming information, hut. if certainty is to hc increased, frivoIt)us registrations should hc avoided. At thc same time, a system in which informatkm is examined so precisely that it becomes exccedingly expensive and difficult to register tr~msactions may end up not reflecting ownership respected by thc community. Controls m~Jy be implemented in various w~ys. Property professionals and tcchnicians may certify information before it is submitted to the registry office. Infornlation may be further v~didated within the registry oftiee as part of the registration procedures. From a risk management perspcctivc, it is important to idcntify certification procedures that add unncccssary costs, e.g. t~y examining aspects which add nothing to security, ~lnd I~y duplicating certification of documents (i.e. certifying them I~et'ore and after thcv enter thc registration systcm). Rather than cxamining informarion tc~ identify all defects, examinations may he reduced to identilying only those detects that may givc r;.," to ~l clainl. In other words, there is limited vaduc in using resources to identify defects that are unlikcly to change the outcome of registration. A comprchcnsivc sct of technic~l and

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Securio,, risk anti registration. D. Pahner

administrative reforms may thus enable certification requirements to be reduced without suffering a loss in security, and, indeed, may actually increase confidence in the quality of information. Improved quality does not come only from examinations, it also requires effective techniques for managing information. Information can be improved considerably through technical efforts to reduce ambiguity, for example by adopting a parcel-based system (rather than a grantor/granteebased system) and using appropriate computer technology to speed information retrieval and processing of transactions. Standardizing and simplifying procedures, forms, and terminology may go a long way to reducing the chance of errors. For example, standardized forms may result in information (such as whether the property rights are held by one person or by a married couple) being easily located. Standardized terminology may make the information more easily understandable, especially to the lay person. (For example, the New Brunswick Standard Forms of Conveyancing Act, accepted the single word 'conveys" in place of some 40-or-so words previously used in deeds to express the same meaning.) Finally, registered information must be provided rapidly enough to manage risk. Market transactions are often time-sensitive: a person such as a lender or prospective purchaser wishing to determine a property holder's claim to a parcel may need to make a decision within a certain period of time. If information cannot be retrieved quickly enough from a registry,, transactions potentially beneficial to society may not be concluded. Efficient systems may raise quality levels by allowing scrutiny by the public. Problems not caught bc|k~re registration may be identified quickly if transactions are registered in a speedy manner and if it is easy fl~r people to obtain infl~rmation regarding those new registrations.

Protection mechanisms ~f securi(v Protection mechanisms provide security by allowing registered rights to be enfl~rced. One aspect of protcctkm cxmcerns processes for managing conflicts when they occur. The processes used can greatly affect perceptions of security. Legal security is reduced when lengthy delays create uncertainty regarding the property, and when high costs associated with protracted proceedings place formal protection beyond the reach of most people in poor countries. More efficient processes, for example using administrative mechanisms rather than judicial ones, may result in increased security. Disputants arc more likely to accept resolutions if they view the process to be fair. What constitutes due process may vary considerably: processes appropriate in one context may not be suitable in others. In some cases, processes may be determined by formal judicial or administrative rules. In other cases, processes inw~lving mediation may bc informed by a variety of factors, including locally accepted rules. A second aspect of protection concerns the outcome of conflict management processes, i.e. the extent to which a person is protected by guarantees and indemnities. A guarantee essentially protects a purchaser (and hence that person's mortgagee) against losing registcred property rights. q'orrens-bascd" jurisdictions famously guarantee their registers in two senses. On the one hand, thcrc is a positive warranty. The title of the registered owner is as stated on the register, since transfer and vesting of ownership take place with the act of registration in a ~positivc" registration system. On the other hand, there is a negative warranty, since the only way to acquire legal ownership is through registration. In general, Roman law-based jurisdictions do not have positive registration systems. Nonetheless, some form of guarantee is provided, since ownership registered in the 91

Secut4(v. ri~k atul regi,~trati~m: D. Pahner

registry may be overruled only by court order. Typically, to overrule registered ownership interests, a court must find evidence of bad faith, ~md the challenger has the burden of showing that the registered owner did not enter the transaction in good faith. The guarantee is much stronger in Roman-Dutch law countries (such as South Africa), which like Torrens jurisdictions, have a negative warranty of title. At the lowest level, a registration system may provide a minimal guarantee that a registered instrument has priority over an unregistered one, but that the priority obtained by registration may be lost by knowledge of another instrument executed earlier but registered later (Simpson, 1976). An indemnity represents a 'comfort factor" for users of a registration system by providing compensation in cases of loss arising from registration. The development of national land and credit markets, and, in particular, secondary mortgage markets, is dependent on investors being indemnified. at low cost, in case of loss. Such indemnitication may be provided by public and/or private funds. A number of variations exist. In comprehensive indemnification programs (such as Sweden's), a pcrson suffering loss because of an error in the registry receives compensation regardless of the source of the error. Limited programs (such as South Africa) may indcmnity a person who suffers loss as a result of registry officials to act bona tide or to exercise reasonable diligence in carrying out their duties. Some jurisdictions offer no compensation and expect an injured party to recover damages from those who caused the loss in the case of fraud, or from professionals in the case of their negligence. Such a rcmedy may place responsibility where it belongs but may bc unsatisfactory for several reasons. The proceedings tend to be adversarial. 3''he injured party may have to take action against a property professional based in a distant city. The property professional may bc unable to pay for a variety of reasons, including death. In addition, the loss may result for some reason other than the property professional's negligence. For reasons such as these, a title insurance industry developed in the USA. To a large extent, the dominant position reached by the American title insurance industry is not because of demand by owners, but rather becausc lenders use it to shift risk away from themselves. Virtually every mortgage means a s~de of title insurance coverage. Consequently, even thosc buying land in Amcrican jurisdictions with Torrcns-style systems end up paying for title insurance. To optimize security, an insurance system should complement, rather than duplicate, a registration system. A major cost of American title insurance companies is the maintenance of private databases of property infi~rmarion that allow title searches to be performed more efficiently than using public records. When public registration systcms operate efficiently, the cost of insurance premiums should have to cover only the marginal costs of providing coverage and not the full cost of maintaining private databases. This is indeed how statc indemnity funds of Torrcns-style systems arc intended to function, l lowever, the failure of such state systems, particularly in the USA, to have sufficient funds to cover claims is well documented. This is somewhat ironic, since the great success of the American secondary mortgage market is based on government guarantees which, in turn, arc funded by charges levied against participants in the system.

Relationship between #lformation and protection mechanisms From a risk management perspective, information mechanisms of security cannot be separated from protection mechanisms. A rational person wilt not provide coverage against loss if the chance of loss occurring is exces-

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sively high. Property professionals, state registry offices, and title insurance companies minimize the risk of loss (i.e. reduce the frequency and severity of claims) by examining the quality of information about owncrship and thc parcels. They will, in fact, only accept responsibility for cascs in which they believe losses arc unlikely to occur. In other words, the better the information one has, the easicr it is to offer protection in case of loss. In practical terms, thcrc may bc no differcncc bctwccn a positivc (title) registration system that has a divesting effect and a negative (deeds) system that provides only evidence of transfer and vesting. Both types of system require similar quality of information in order to function well. Consequently, it may bc more cost-effective for jurisdictions with negative systems to introduce administrative and technical reforms that improve the quality of information rather than attempt to transform those systems into positive ones.

Concluding comments Formal property arrangements havc a potentially large role to play in fostering social, economic, and political development. As information systems, land registration systems can be used to address land management requirements. The effective management of land tenure information can create linkages between people and the land, private and public interests, and economic development and environmental protection (Nichols, 1993). "['he information has value only if it is current. Registry, information is a public good, used by governments and society at large, but it is provided on the basis of individual transactions. If new owners and heirs do not seek t\~rmal recognition of transfers, registry information will no longer reflect the reality on the ground. Why would individuals want to register their property rights? Appropriate incentive structures must be created to produce such productive cooperation (Olscn, 1996). Rapaczynski (1996) has argued that certain economic measures undertaken by governments may contribute more to the establishment of viable property rights than volumes of laws and legions of enforcers. I,egal security can be an important benefit to informal property owners. A registration system gives security when it provides sufficient, accurate information before registration, and protection of rights after registration. But, since people receive security from a variety of extra-legal sources, they will tend to view legal security as a benefit only if it adds significantly to the total security thcy enjoy, and if its costs are affordable. If the costs of registering a transaction exceed the associated benefits, transactions will take place in the informal market. Perhaps of greater importance to the development of a market economy is thc legal security that a land registration system gives to third parties, such as lenders, it is plausible that many home owners in rich countries register their property rights, not because they recognize that registration provides them with security, but because their mortgagees demand it as a condition for giving the loans needed to purchase those homes. Creditors will use a registration system to protect their loans only if its transaction costs are low enough to make the loan conditions attractive. A registration system provides security if the information is current, but intk~rmation can be current only if people use the registration system. The system will be used only if it provides security at affordable transaction costs. If registration systems can provide cost-effective business opportunities for lenders, access to credit can drive the updating of registry information. The potential power of credit as an incentive for registration is 93

Secur/t); risk aml n'gistration." 1). Pahm'r

illustrated by personal (moveable) property registration systems, q'hcir raison d'dtrc is to provide security to lenders; they provide no security to owners of the collateral, nor arc they mandated by government. Structuring an appropriate set of market-oriented incentives for creditors may strengthen the security offered by land registration systems. References Atwood. D. (1990) I,and registration in Africa: the impact cm agricultural production. World l)erelol?ment 18( Suppl.5 ), 65¢,~-671. Berry, S. (198t)) Social institutions and access to resources. Al}'ica 59(Suppl. I), 41-55. De Solo, I I. (1989) 77w Other Pat/:. I larper and Row. New York. Ellickson, R. (1091) Order Without Law. Harvard University Press, ('~,mbridge, MA. Gambclta, D. (1993) lJw Sicilian Malia. I larvard University Press, ('ambridgc, MA. Haugcrud, A. (1983) The consequences of land tenure reform among sm;,llholders in the Kenya highlands. Rural AJhcana 1516, 65-89. Hoff, K. anti Stiglitz J. (1993). hnpcrfect infl~rmation and rural credit markets: puzzles and policy perspectives. In I-conomics of Rural (hganization, cds. K. HolT, A. Bravcrman and J. Stiglitz, pp. 33-52. Oxford University Press, New York. Mcl,aughlin, J. a[ld Palmer D. (It)t)6) I,and registration and development. I I ( ' Joutmt[. Nichols, S. (1993) l,and registration: managing inlornmtion lot land administration. Department of Surveying Engineering Technical Report No. 168, University of New Brunswick, Frcdcricton, N.B. ('anada. Olscn, M. (1996) Big bills left on the sidewalk: why some nations arc rich, and others poor. Journal ol'fk'ommzic l'erweclilz's IO(Suppl.2), 3-24. Pahncr, D. (1996). incentive-based maintenance of hind registration systems. Ph.D dissertation, University of Florida, Gainesville. l,?,apaczynski, A. (1996) The role of the state and the market in establishing property rights. Journal of Economic Perwectires 10(Suppl.2), 87- 11)3. Simpson, S.R. (1976) l,and l,a~v and Registration. Cambridge t;nivcrsity Press, ('ambridgc.

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