People respond to incentives. That is why they make decisions by comparing the negative and positive aspects of an activity, product, or service, and usually choose what produces more positive (benefits) or less negative (costs) outcomes.

If the costs or benefits of, for example, a product change, people’s decisions regarding that product will likely change as well. We know that when fuel prices rise, there is a disincentive to consume fuel (even if that was not the purpose of the price increase), and people respond to that change. The response to this may be that people decide to use their vehicles less often.

This is how people respond to any economic or non-economic activity they engage in. In principle, we only engage in activities that produce the most benefits for us or, among the available options, involve the least costs. Applying this to the issue at hand, a person will make an investment as long as they understand that there is a possibility of obtaining a benefit from it. No one invests to lose.

So, when someone embarks on remodeling their home, it is because they understand that doing so will bring them more benefits than not doing it, whether those benefits are current or future, economic or non-economic. The current benefits we would obtain in this case would be, for example, additional recreational space, or perhaps something as simple as not having leaks that affect the paint on the house. A future benefit that would be obtained, and which we also take into account before starting the project, is how the remodeling will increase the market value of the property, and that if we decide to sell or rent it, we will be able to demand a higher price because the property is in better condition.

These are decisions that have nothing to do with the government and are made privately, right? Let’s add an additional element to our example before answering that question. If the person who is going to remodel their property does not have a title deed or if the title deed is not protected and guaranteed, any third party could occupy the property and claim it as their own. Or, the government itself could take it without any compensation to the owner.

If this were the case, we would certainly consider the costs we would incur before carrying out the renovation. We would then see that we would possibly have no benefits if any third party could occupy our property without paying anything in return or if the government could expropriate it without compensation. We would conclude that the costs outweigh the potential benefits, and therefore the activity is not worthwhile. Therefore, we would probably not remodel the property because there is no guarantee that our investment would remain with us. In other words, we are not receiving the necessary incentives to invest in the property; in fact, we are being discouraged from doing so.

Taking the above into account, we can now answer the question we left pending and say that people do not make these investment decisions regardless of government action. Consciously or unconsciously, people consider the possibility that the benefits to be obtained will remain with them when making the decision to invest.

Consequently, and now in a positive sense, when a person is confident that once their property has been renovated, they will be able to sell it at the market price, and that there will be no arbitrary intervention by third parties or the state, they will have the right incentives to invest.

Hence the importance of recognizing property rights; hence the need for titles that recognize the right and assign an owner to that right, since it works in two ways: on the one hand, the right of use, enjoyment, and disposal of the property by the owner; and on the other hand, the limitation on third parties not to affect that right without the prior consent of the owner. Without the protection of both elements, property rights are not complete.

As a result, the mere existence or recognition of a “property right” does not create sufficient incentives for people to invest; it is necessary and more important that there be certainty in the perception that such rights will be effectively protected and defended in the event of third-party intervention, and that there will be no arbitrary intervention by the State.

Before concluding, it is worth noting that we recognize that “private property” may not be the only system of property that works; and in this sense, other systems must also provide appropriate incentives; for example, knowing that investing in the property one lives in produces benefits for society as a whole, if that is how that society works; that could produce the right incentives in that case.

We can therefore conclude that it is the responsibility of the state to create and maintain a sufficiently strong and accurate structure for recognizing and protecting property rights, so that people receive sufficient incentives to invest.