Econ 522 Economics of LawAnnouncementsHarold Demsetz, “Toward a Theory of Property Rights”Slide 4Demsetz also gives a nice interpretation/ example of the Coase TheoremOur story so far on property law…Different types/sources of transaction costsSlide 7What we know so far…Two normative approaches to property lawSlide 11Which approach should we use?So now we have one general principle we can use for designing property lawBut…Slide 14Experiment: Coasian bargainingSlide 17Slide 18Slide 19Slide 19Slide 20Four questions we need to answerNext question: choosing a remedy for property rights violationsCalabresi and Melamed treat property and liability under a common frameworkThree possible ways to protect an entitlementSlide 26Comparing property/injunctive relief to liability/damages ruleComparing injunctive relief to damages – exampleFirst, we consider the non-cooperative outcomesNoncooperative payoffsWhat about with bargaining?Comparing injunctions to damages…Slide 33So now we know…Exactly agrees with our earlier principleHigh transaction costs damages Low transaction costs injunctive reliefA different view of the high-transaction-costs case…Low transaction costs injunctive reliefSo, do we buy it?Third way to protect an entitlement: inalienabilitySlide 41Slide 42Slide 43Public versus Private GoodsSlide 45Slide 46Slide 47Slide 48This accords with a principle we just sawA different view: transaction costsHow do we design an efficient property law system?What can an owner do with his property?Slide 53Fugitive propertyTwo principles for establishing ownershipFirst Possession versus Tied OwnershipSlide 57This brings us to the following tradeoff:A nice historical example: the Homestead Act of 1862Friedman on the Homestead Act of 1862Slide 61So, what does an efficient property law system look like?Econ 522Economics of LawDan QuintSpring 2014Lecture 62First midterm: Monday March 3Second midterm: Wednesday April 16Announcements3“A close relationship existed, both historically and geographically, between the development of private rights in land and the development of the commercial fur trade.Because of the lack of control over hunting by others, it is in no person’s interest to invest in increasing or maintaining the stock fo game. Overly intensive hunting takes place.Before the fur trade became established, hunting was carried on primarily for purposes of food and the relatively few furs that were required for the hunter’s family. The externality was clearly present… but these external effects were of such small significance that it did not pay for anyone to take them into account.”Harold Demsetz, “Toward a Theory of Property Rights”4“The advent of the fur trade had two immediate consequences. First, the value of furs to the Indians was increased considerably. Second, and as a result, the scale of hunting activity rose sharply. Both consequences must have increased considerably the importance of the externalities associated with free hunting. The property right system began to change…”…even though property rights were not developing in the Southwest, where the commercial fur trade had not developedHarold Demsetz, “Toward a Theory of Property Rights”5“There are two striking implications… that are true in a world of zero transaction costs.The output mix that results when the exchange of property rights is allowed is efficient,and the mix is independent of who is assigned ownership.For example, the the efficient mix of civilians and military will result from transferable ownership no matter whether taxpayers must hire military volunteers or whether draftees must pay taxpayers to be excused from service.For taxpayers will hire only those military (under the “buy-him-in” property right system) who would not pay to be exempted (under the “let-him-buy-his-way-out” system).”Demsetz also gives a nice interpretation/ example of the Coase Theorem6Coase: absent transaction costs, if property rights are complete and tradable, we’ll get efficiency through voluntary negotiationSo we can always get efficient outcomes “automatically”……provided there are no transaction costsBut what to do when there are?Our story so far on property law…7Search costsBargaining costsAsymmetric information/adverse selectionPrivate information/not knowing each others’ threat pointsUncertainty about property rights/threat pointsLarge numbers of buyers/sellers – holdout, freeridingHostilityEnforcement costsDifferent types/sources of transaction costsSo if there are transaction costs, what should we do?No transaction costs initial allocation of rights doesn’t matter for efficiencywherever they start, people will trade until efficiency is achievedSignificant transaction costs initial allocation does matter, since trade may not occur (and is costly if it does)This leads to two normative approaches we could takeWhat we know so far…Design the law to minimize transaction costs“Structure the law so as to remove the impediments to private agreements”Normative Coase“Lubricate” bargainingTwo normative approaches to property lawDesign the law to minimize transaction costs“Structure the law so as to remove the impediments to private agreements”Normative Coase“Lubricate” bargainingTry to allocate rights efficiently to start with, so bargaining doesn’t matter that much“Structure the law so as to minimize the harm caused by failures in private agreements”Normative HobbesTwo normative approaches to property lawCompare cost of each approachNormative Coase: cost of transacting, and remaining inefficienciesNormative Hobbes: cost of figuring out how to allocate rights efficiently (information costs)When transaction costs are low and information costs are high, structure the law so as to minimize transaction costsWhen transaction costs are high and information costs are low, structure the law to allocate property rights to whoever values them the mostWhich approach should we use?When transaction costs are low, design the law to facilitate voluntary tradeWhen transaction costs are high, design the law to allocate rights efficiently whenever possibleSo now we have one general principle we can use for designing property law14The normative Coase approach means relying on bargaining to reallocate rights
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