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Fence Laws, Liability Rules, and Agricultural Productivity

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Jingyi Huang studies how the default private property protection liability can lead to persistent resource misallocations.

Image courtesy of interviewee. June 14, 2024

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This video is a transcript of an interview discussing the concept of "fence laws" and their implications in the American West, particularly how they relate to property rights, agricultural land use, and economic outcomes.

1. **Context and Importance of Fence Laws**: Fence laws dictate who is liable for building fences between neighboring properties, particularly between farmers and ranchers. These laws evolved over time as regulators sought to accommodate the growing settlement in the West and the rising costs of fencing.

2. **Historical Evolution**: Initially, farmers were required to build fences to keep livestock out, but as fencing costs increased, liability shifted towards ranchers. This video created a mix of regulations across adjacent counties, leading to different outcomes based on the imposed liabilities.

3. **Theoretical Framework**: The discussion references Ronald Coase's theorem, which suggests that resource allocation should be efficient regardless of liability assignment. However, in reality, transaction costs and regulatory frameworks can lead to inefficiencies.

4. **Empirical Analysis**: The researcher collected data on the history of fence laws and agricultural outputs from several states. By focusing on adjacent counties with differing regulations, she aimed to isolate the effects of these laws on land use and settlement patterns.

5. **Findings**:
- Shifting liabilities from farmers to ranchers encouraged more agricultural land use and improved investment in land.
- Total agricultural output increased, although average output per acre remained constant, indicating no productivity gains.
- Changes in liabilities negatively affected land claims by potential buyers but did not impact homesteaders.

6. **Conclusions and Implications**: The findings emphasize the significance of regulatory nuances in property rights, suggesting that even well-defined rights can lead to market inefficiencies. It calls for further research into subtle property right rules and their impacts, relevant both historically and in present-day scenarios.

The setting and discourse indicate a detailed academic inquiry into property rights and agricultural economics, emphasizing the ongoing relevance of these issues.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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The context is fence laws in the America West.

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This is a very esoteric regulation.

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What it does is assign the default

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property protection liabilities to one side

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or the other side of the market.

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So imagine this, you have a farmer

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and a rancher next door to each other.

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The cattle from the ranchers may trespass

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and damage the crops of the farmer's land.

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So someone needs to build a fancy middle to stop that.

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What the fence loss does, it defines who should build it.

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Does the farmer needs to erect the fence

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or does the rancher needs to control their, livestocks.

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And it was a big issue in the American West.

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One reason is that naturally it's environment

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where you can profitably grow both livestock and crops.

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So you have a mixture of animals with farmers

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and that's where the problems happen.

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And second fences was actually very expensive.

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It's one of the most expensive capital investment,

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frontier farmers have to put in.

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You need to spend more money to fence 160 acre

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of plot than the cash value you can buy the land for.

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So it matters a great deal who is legally liable for this?

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And as you can imagine, there were many violent

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conflicts over the fence laws for more than half a century.

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So something's telling us that something's wrong

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with the regulations.

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There was a long evolution of how the regulation changes.

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Um, at the beginning,

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regulators were concerned about attracting new

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settlers to the frontier.

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Um, so every state, most of the states started off

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by asking the farmers to erect a fence

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to keep the livestock out.

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And as time passes by

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and the fencing costs becomes such a big problem,

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regulators start to change the rules

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to shift the liabilities from farmers to ranchers.

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But this shifts happens gradually.

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So you ended up with a checkerboard pattern

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where adjacent county is

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with almost exactly the same natural environment, ended up

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with different regulations at different points in time.

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And so this basically creates the perfect

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natural environment for us to empirically test.

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Does the regulation matter? And how much does it matter?

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There's this famous coast theorem proposed

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by Ronald Coast in his seminal paper,

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the Problem of social Cost.

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He used exactly the same example we had before a farmer

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and a rancher and cattle cause damages.

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What he finds is that in theory, regardless of who's liable

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to build the fence, resource allocation will

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be efficient in the end.

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But that's a big if

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because in reality, we don't have zero transaction costs.

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We don't have frictionless market.

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In fact, what defense law does is essentially

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increase the transaction cost to infinity

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because you cannot contract against the

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statutory requirement.

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And theorists know this.

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Um, so har dim sets have shown that in theory,

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when there is transaction cost,

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there will be inefficient allocations and welfare loss.

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And there are empirical cases on fence loss two.

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So another famous, study as by Beck, he look at

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how does the introduction of barb, the wire fences

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change the responses in the market?

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So Barb, the wire was this miracle invention

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that drastically reduced the cost of fencing

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and make it makes it very feasible for you

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to settle on land and build a fence.

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What he found is that when the cost of fencing reduces,

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it increased the settlement, it increased the land value,

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it increased the productivity.

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But there's a catch bob.

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The wire is a technological pro solution

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to the problem, right?

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It reduces the cost, but it reduces cost to everyone.

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It does not shift the liabilities from

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one side to the other.

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So what I'm looking at is the

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statutory solution to the problem.

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How does the regulation change affect the outcomes?

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And on top of that, B wire was not invented

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and adopted widely until the 1880s,

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but most of the regulation changes happened,

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during the 1860s and seventies.

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So it's a different time period and a different solution.

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Um, more broadly speaking, ven law is a type

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of property rights production.

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And many economists have studied the role

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of property rights in a lot of environment,

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especially in the developing literature.

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So team ley studied

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how different property rights structures incentivize

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different investment, schemes.

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In Ghana, Martin Fiman

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and Gary Le have compared America and Argentina

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and find that the initial property rights allocations caused

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persistent differences in farm structure

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and agriculture production.

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Um, but again, what's different in this setting is

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that in many environment, envir settings,

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researchers were focusing on formalizing

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and delineating property rights, figuring out who has what

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and make it transferable in the market.

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That was never the problem In the US

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property rights was always well-defined and protected.

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But this very specific liability rule under this,

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well-defined property rights,

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Uh, structure still matters

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and it still increase, cost inefficiency in the market.

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The first data is defense laws.

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Where are the laws recorded?

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I collected this from, county state session laws.

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Section law documented all the regulation changes

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including adoption amendment

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and repeals happened

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during any legislative session at either a state

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or territorial of government.

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Uh, this is recorded once or every one

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or two years, depending on the legislative calendar.

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So it's very frequent.

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So I click the data for eight states

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on the Great Plains from the initial legislation,

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all the way to 1930.

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This gimme a sample about close

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to 700 regulation changes over the time.

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Uh, that's on the regulation side of what changes

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on the outcome side.

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I use the data from the census of agriculture

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and land pa land pattern from the Bureau of Land Management.

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So these were the data contents, agricultural land use,

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output, farm size and settlement types.

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And those were the outcomes that I cared about.

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Um, so from the data, I can see how the defense law changes

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and the historical pattern,

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the change occurred at the county level.

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Um, it can be driven by either a statewide adoption

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or county level exemptions,

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but what happens is that it gives you a mixed checkerboard

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of how the fence laws will pan out at any,

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any given point in time.

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So you would have adjacent counties ended up

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with very different liability rules, from time to time.

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And this allowed me to evaluate the empirical, result

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of fence loss and economic outcomes, right?

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So the motivation of the empirical test is very intuitive.

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So imagine you have two farmers into neighboring counties.

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They both need to choose what fraction of land

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and what are the variable inputs like labor to allocate

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between two types of outputs crops or livestocks.

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Um, they face two exogenous factors

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that influence their aggregate output.

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One is productivity, which depends on the natural

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conditions technology.

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The other one is defensible how much you get out of the land

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net of the damages you may face.

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So landowner's problem is basically trying to

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maximize the total profit out of the land

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by choosing the input materials given the prices

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of the input at our good market.

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So this means that their optimal choice is gonna be a

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function of the factors that affect their output.

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So which is productivity, input prices,

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output prices, and the fence law.

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So for two farmers nearby,

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they're gonna have the same productivity level

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because your natural environment is very similar.

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You also have, similar levels of,

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technology available.

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So their productivity is the same.

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They're also price takers in both the input

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and the output market.

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So their prices are the same.

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The only difference left in their choice is what type

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of fence law they're facing.

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So by comparing these two adjacent counties,

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we can reasonable attribute the differences in outcomes

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to differences in regulations.

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Sounds easy, but there are some challenges in the,

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in the analysis when you look at the law.

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So one problem is that

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every county is always subject to some type of law.

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There's never any ambiguity of who's responsible for it,

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because almost at the very first legislature,

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every state determines who's liable for it, which means

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that there is not the conventional quote unquote untreated

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group that were not subject to any regulations.

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So to deal with this, I define the treatment here to be the

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relative change with respect to your neighbor.

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So you'll either increase the ranchers liability relative

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to your neighbor or decrease,

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or shift the liability

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to the farmers relative to your neighbor.

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So that solves the one problem.

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The other problem is that the change happens multiple times

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even at the county level.

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So more than half

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of the county in the sample changed the laws more than two

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times after the initial adoption.

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So you have a very complicated treatment path or back

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and forth, in a lot of cases,

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which makes the comparison quite hard to interpret.

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So to simplify, the situation for the analysis,

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I restricted the sample to just adjacent counties

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where only one county in the pair has changed the

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regulations and only changed once.

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So we ended up with a group of clean treatment

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and the controls where you guys started off the same one guy

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for some idiosyncratic raise and changed the regulations,

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and then we can compare the outcomes there.

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There are three main groups of findings.

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So first is on land use.

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What I find is that shifting the liability from farmers

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to ranchers increase the share

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of land using agricultural production

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Or landing farms.

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And in addition to the aggregate change, I also find

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that almost all the increase in the agricultural land comes

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from improve the land.

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Meaning that people are not just going out there

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and claiming more plots.

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They were actively invested in the land

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to convert the natural prairie lands into farmlands

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through plowing or irrigation.

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So the shifting in liabilities increase the scale

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of agricultural production just by increased

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how many plots of land you're plowing.

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Second is, aggregated output

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because you sh when you shift the liabilities from farmers

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to ranchers induced more land use,

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you naturally have more output coming out of your area.

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So the total output per acre of county areas cha increased.

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The caveat here is that there's no efficiency gains.

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So the average output per acre of farmland

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actually stays the same between the two adjacent counties.

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So meaning that there were actually no productivity gains

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or any type of economy scale in agriculture

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sectors at that point.

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So those were aggregate conditions

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that reflects the stock of

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what we have on the market at any, any point in time.

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But we also want to know what happens to the flow

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or the new settlers,

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because remember, a big policy concern back then is

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to attract more people.

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So we want to know does change the regulations actually

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ended up doing that.

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So to see this, I used the land patent data

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from the Bureau of Land Management.

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The land patents is issued to everyone who

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acquired land from the federal government.

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So any transaction from the federal holding

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to private holding is recorded by a patent.

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What is particularly important is

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that this data contains information on the types

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of claims that was filed.

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So was your land claimed through homestead

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or did you buy your land with cash directly?

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We also have information on the location of land

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and the size of the plot.

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So this gave us a sense of where are the newcomers,

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who are the newcomers and how they're selling.

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So using this data, I find

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that increasing farmers' liability seems to be a bad idea.

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The policymakers are right.

14:30.535 --> 14:32.285
Increasing farmers' liability

14:32.825 --> 14:35.005
or requiring them to enclose their land

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reduces the total number of land claims

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and reduces the total acreage of land claims only

14:43.285 --> 14:44.325
through cash purchase

14:45.305 --> 14:48.365
and conditional, you are buying a plot of land.

14:48.945 --> 14:50.885
The acreage of your plot also,

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Uh, shrinks if you settle in a place

14:53.835 --> 14:56.765
that has more liability on farmers than ranchers.

14:58.095 --> 15:01.105
However, this effect is not asymmetrical.

15:01.365 --> 15:05.105
So if we look at homestead patents, it stays the same.

15:05.135 --> 15:08.985
There's no change between the two adjacent counties in terms

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of number of patents filed, the total acreage claimed

15:13.245 --> 15:16.585
or the average plot size claimed, under homestead,

15:16.735 --> 15:19.105
even when the property rights were well-defined

15:19.105 --> 15:20.225
and well protected.

15:20.885 --> 15:24.745
The subtle rules of liability assignment can still have

15:25.275 --> 15:27.625
persistent and large inefficiency

15:27.625 --> 15:28.985
implications on the market.

15:30.045 --> 15:32.545
And this is not just a historical relic.

15:33.085 --> 15:37.025
We still see conflicts over offenses today, both in the US

15:37.245 --> 15:38.705
and in developing countries.

15:39.445 --> 15:41.665
And this suggests that we need more research

15:42.215 --> 15:45.345
into property rights, not just on formalizing

15:45.525 --> 15:47.705
or delineating property rights,

15:48.005 --> 15:51.465
but also on the nuanced requirements that were attached

15:51.465 --> 15:51.865
to the rules.

00:00 - The context is fence laws in the America West. This is a very esoteric regulation. What it does is assign the default property protection liabilities to one side or the other side of the market. So imagine this, you have a farmer

00:18 - and a rancher next door to each other. The cattle from the ranchers may trespass and damage the crops of the farmer's land. So someone needs to build a fancy middle to stop that. What the fence loss does, it defines who should build it. Does the farmer needs to erect the fence or does the rancher needs to control their, livestocks. And it was a big issue in the American West. One reason is that naturally it's environment where you can profitably grow both livestock and crops.

00:56 - So you have a mixture of animals with farmers and that's where the problems happen. And second fences was actually very expensive. It's one of the most expensive capital investment, frontier farmers have to put in. You need to spend more money to fence 160 acre of plot than the cash value you can buy the land for. So it matters a great deal who is legally liable for this? And as you can imagine, there were many violent conflicts over the fence laws for more than half a century.

01:33 - So something's telling us that something's wrong with the regulations. There was a long evolution of how the regulation changes. at the beginning, regulators were concerned about attracting new settlers to the frontier. so every state, most of the states started off by asking the farmers to erect a fence to keep the livestock out. And as time passes by

02:01 - and the fencing costs becomes such a big problem, regulators start to change the rules to shift the liabilities from farmers to ranchers. But this shifts happens gradually. So you ended up with a checkerboard pattern where adjacent county is with almost exactly the same natural environment, ended up with different regulations at different points in time. And so this basically creates the perfect natural environment for us to empirically test.

02:31 - Does the regulation matter? And how much does it matter? There's this famous coast theorem proposed by Ronald Coast in his seminal paper, the Problem of social Cost. He used exactly the same example we had before a farmer and a rancher and cattle cause damages. What he finds is that in theory, regardless of who's liable to build the fence, resource allocation will be efficient in the end. But that's a big if

03:04 - because in reality, we don't have zero transaction costs. We don't have frictionless market. In fact, what defense law does is essentially increase the transaction cost to infinity because you cannot contract against the statutory requirement. And theorists know this. so har dim sets have shown that in theory, when there is transaction cost, there will be inefficient allocations and welfare loss.

03:34 - And there are empirical cases on fence loss two. So another famous, study as by Beck, he look at how does the introduction of barb, the wire fences change the responses in the market? So Barb, the wire was this miracle invention that drastically reduced the cost of fencing and make it makes it very feasible for you to settle on land and build a fence. What he found is that when the cost of fencing reduces, it increased the settlement, it increased the land value,

04:08 - it increased the productivity. But there's a catch bob. The wire is a technological pro solution to the problem, right? It reduces the cost, but it reduces cost to everyone. It does not shift the liabilities from one side to the other. So what I'm looking at is the statutory solution to the problem. How does the regulation change affect the outcomes?

04:35 - And on top of that, B wire was not invented and adopted widely until the 1880s, but most of the regulation changes happened, during the 1860s and seventies. So it's a different time period and a different solution. more broadly speaking, ven law is a type of property rights production. And many economists have studied the role of property rights in a lot of environment, especially in the developing literature.

05:05 - So team ley studied how different property rights structures incentivize different investment, schemes. In Ghana, Martin Fiman and Gary Le have compared America and Argentina and find that the initial property rights allocations caused persistent differences in farm structure and agriculture production. but again, what's different in this setting is that in many environment, envir settings,

05:35 - researchers were focusing on formalizing and delineating property rights, figuring out who has what and make it transferable in the market. That was never the problem In the US property rights was always well-defined and protected. But this very specific liability rule under this, well-defined property rights, structure still matters and it still increase, cost inefficiency in the market. The first data is defense laws.

06:06 - Where are the laws recorded? I collected this from, county state session laws. Section law documented all the regulation changes including adoption amendment and repeals happened during any legislative session at either a state or territorial of government. this is recorded once or every one or two years, depending on the legislative calendar. So it's very frequent.

06:38 - So I click the data for eight states on the Great Plains from the initial legislation, all the way to 1930. This gimme a sample about close to 700 regulation changes over the time. that's on the regulation side of what changes on the outcome side. I use the data from the census of agriculture and land pa land pattern from the Bureau of Land Management. So these were the data contents, agricultural land use,

07:10 - output, farm size and settlement types. And those were the outcomes that I cared about. so from the data, I can see how the defense law changes and the historical pattern, the change occurred at the county level. it can be driven by either a statewide adoption or county level exemptions, but what happens is that it gives you a mixed checkerboard of how the fence laws will pan out at any, any given point in time.

07:44 - So you would have adjacent counties ended up with very different liability rules, from time to time. And this allowed me to evaluate the empirical, result of fence loss and economic outcomes, right? So the motivation of the empirical test is very intuitive. So imagine you have two farmers into neighboring counties. They both need to choose what fraction of land and what are the variable inputs like labor to allocate between two types of outputs crops or livestocks. they face two exogenous factors

08:25 - that influence their aggregate output. One is productivity, which depends on the natural conditions technology. The other one is defensible how much you get out of the land net of the damages you may face. So landowner's problem is basically trying to maximize the total profit out of the land by choosing the input materials given the prices of the input at our good market. So this means that their optimal choice is gonna be a

08:56 - function of the factors that affect their output. So which is productivity, input prices, output prices, and the fence law. So for two farmers nearby, they're gonna have the same productivity level because your natural environment is very similar. You also have, similar levels of, technology available. So their productivity is the same. They're also price takers in both the input

09:28 - and the output market. So their prices are the same. The only difference left in their choice is what type of fence law they're facing. So by comparing these two adjacent counties, we can reasonable attribute the differences in outcomes to differences in regulations. Sounds easy, but there are some challenges in the, in the analysis when you look at the law. So one problem is that

09:57 - every county is always subject to some type of law. There's never any ambiguity of who's responsible for it, because almost at the very first legislature, every state determines who's liable for it, which means that there is not the conventional quote unquote untreated group that were not subject to any regulations. So to deal with this, I define the treatment here to be the relative change with respect to your neighbor. So you'll either increase the ranchers liability relative to your neighbor or decrease,

10:36 - or shift the liability to the farmers relative to your neighbor. So that solves the one problem. The other problem is that the change happens multiple times even at the county level. So more than half of the county in the sample changed the laws more than two times after the initial adoption. So you have a very complicated treatment path or back and forth, in a lot of cases,

11:04 - which makes the comparison quite hard to interpret. So to simplify, the situation for the analysis, I restricted the sample to just adjacent counties where only one county in the pair has changed the regulations and only changed once. So we ended up with a group of clean treatment and the controls where you guys started off the same one guy for some idiosyncratic raise and changed the regulations, and then we can compare the outcomes there. There are three main groups of findings.

11:41 - So first is on land use. What I find is that shifting the liability from farmers to ranchers increase the share of land using agricultural production Or landing farms. And in addition to the aggregate change, I also find that almost all the increase in the agricultural land comes from improve the land. Meaning that people are not just going out there and claiming more plots.

12:08 - They were actively invested in the land to convert the natural prairie lands into farmlands through plowing or irrigation. So the shifting in liabilities increase the scale of agricultural production just by increased how many plots of land you're plowing. Second is, aggregated output because you sh when you shift the liabilities from farmers to ranchers induced more land use, you naturally have more output coming out of your area.

12:42 - So the total output per acre of county areas cha increased. The caveat here is that there's no efficiency gains. So the average output per acre of farmland actually stays the same between the two adjacent counties. So meaning that there were actually no productivity gains or any type of economy scale in agriculture sectors at that point. So those were aggregate conditions that reflects the stock of what we have on the market at any, any point in time.

13:20 - But we also want to know what happens to the flow or the new settlers, because remember, a big policy concern back then is to attract more people. So we want to know does change the regulations actually ended up doing that. So to see this, I used the land patent data from the Bureau of Land Management. The land patents is issued to everyone who acquired land from the federal government.

13:48 - So any transaction from the federal holding to private holding is recorded by a patent. What is particularly important is that this data contains information on the types of claims that was filed. So was your land claimed through homestead or did you buy your land with cash directly? We also have information on the location of land and the size of the plot. So this gave us a sense of where are the newcomers,

14:18 - who are the newcomers and how they're selling. So using this data, I find that increasing farmers' liability seems to be a bad idea. The policymakers are right. Increasing farmers' liability or requiring them to enclose their land reduces the total number of land claims and reduces the total acreage of land claims only through cash purchase and conditional, you are buying a plot of land.

14:48 - The acreage of your plot also, shrinks if you settle in a place that has more liability on farmers than ranchers. However, this effect is not asymmetrical. So if we look at homestead patents, it stays the same. There's no change between the two adjacent counties in terms of number of patents filed, the total acreage claimed or the average plot size claimed, under homestead, even when the property rights were well-defined and well protected.

15:20 - The subtle rules of liability assignment can still have persistent and large inefficiency implications on the market. And this is not just a historical relic. We still see conflicts over offenses today, both in the US and in developing countries. And this suggests that we need more research into property rights, not just on formalizing or delineating property rights, but also on the nuanced requirements that were attached

15:51 - to the rules.

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