A Theory of Inalienability

Abstract

This paper develops a theory of inalienability and formally analyze its intertemporal behavior. We argue that a fundamental cause of inalienability is the inalienability of human capital, which makes people unable to commit not to repudiate a contract. In this sense, inalienability serves to raise the stake or cost for a party to withdraw from the contract. Compared with leasehold, inalienability is easy and simple with low transaction costs, but it is also a rough tool. By distinguishing two types of externality, one from the use of asset and the other from asset sale, we develop a two-period model based on the implicit relations among inalienability, joint ownership and durable good monopoly. The model shows that while in most cases inalienability may cause the scale of asset use to decline over time, it can also cause the scale to increase in the second period if the first type of externality is negative and the second type is positive and if the density function of user distribution is non-increasing. It is also found that the larger is the externality, the scale of asset use increases due to the inalienability restriction.