Econ 522 Economics of LawLogisticsOur story so far on property law…Slide 4One application of this: choosing a remedy for property rights violationsCalabresi and MelamedHow do we design an efficient property law system?Public versus Private GoodsSlide 9Slide 10Slide 11Slide 12A different view: transaction costsSlide 13What can an owner do with his property?So, what does an efficient property law system look like?Slide 16Experiment: Coasian bargainingSlide 19Why did we do this?Slide 20Dynamic games and sequential rationalityDynamic gamesWe can put payoffs from this game into a payoff matrix…Slide 25The key assumption behind subgame perfect equilibrium: common knowledge of rationalitySlide 26Intellectual PropertyInformation: costly to generate, easy to imitateInformation: costly to generate, easy to imitatePatents: one way to solve the problemBUT… patents solve one inefficiency by introducing anotherEcon 522Economics of LawDan QuintSpring 2011Lecture 62HW2 (Property Law) online, due 5 p.m. Thurs Feb 24Midterms will be Wed March 2 and Wed March 30Logistics3Coase: in the absence of transaction costs, if property rights are complete and tradable, voluntary negotiations will lead to efficiencyWe can solve externalities by expanding property rights and allowing tradeDemsetz: property rights develop to internalize externalities when the gains from internalization become larger than the cost of internalizationFur trade increased overhunting and therefore value of private property rightsDomestication of the dog decreased the cost of maintaining private propertyOur story so far on property law…4Two normative approaches to the law:Normative Coase: aim to minimize transaction costsNormative Hobbes: aim to allocate rights efficiently (or minimize the need for bargaining/trade)How to choose between two normative approaches?When transaction costs are low and information costs high, design law to minimize transaction costsWhat transaction costs are high and information costs are low, design law to allocate rights efficientlyOur story so far on property law…5Injunctive relief: court clarifies right, bars future violation (punishable as a crime)Damages: court determines how much harm was done by violation, awards payment to injureeCoase: should be equally efficient if there are no transaction costsBut in “real world”, which is more efficient?One application of this: choosing a remedy for property rights violations6Calabresi and MelamedTransaction costs high…difficult for parties to reassign rights through negotiationsinjunction would force injurer to prevent harm himselfdamages rule allows injurer to prevent harm or pay for it, whichever is cheaperwhen transaction costs are high, damages rule is typically more efficient“liability rule”Transaction costs low…easy for parties to reassign rightsinjunctions cheaper for court to implement (doesn’t need to calculate damage done)when transaction costs are low, injunctive relief is typically more efficient“property rule”7what can be privately owned?what can an owner do?how are property rights established?what remedies are given?How do we design an efficient property law system?8Public versus Private GoodsPrivate Goodsrivalrous – one’s consumption precludes anotherexcludable – technologically possible to prevent consumptionexample: applePublic Goodsnon-rivalrousnon-excludableexamples: defense against nuclear attackinfrastructure (roads, bridges)parks, clean air, large fireworks displays9When private goods are owned publicly, they tend to be overutilized/overexploitedPublic versus Private Goods10When private goods are owned publicly, they tend to be overutilized/overexploitedWhen public goods are privately owned, they tend to be underprovided/undersuppliedPublic versus Private Goods11When private goods are owned publicly, they tend to be overutilized/overexploitedWhen public goods are privately owned, they tend to be underprovided/undersuppliedEfficiency suggests private goods should be privately owned, and public goods should be publicly provided/regulatedPublic versus Private Goods12When private goods are owned publicly, they tend to be overutilized/overexploitedWhen public goods are privately owned, they tend to be underprovided/undersuppliedEfficiency suggests private goods should be privately owned, and public goods should be publicly provided/regulatedPublic versus Private Goods13Clean airLarge number of people affected transaction costs high injunctive relief unlikely to work wellStill two optionsOne: give property owners right to clean air, protected by damagesTwo: public regulationArgue for one or the other by comparing costs of eachDamages: costs are legal cost of lawsuits or pretrial negotiationsRegulation: administrative costs, error costs if level is not chosen correctlyA different view: transaction costs14what can be privately owned?what can an owner do?how are property rights established?what remedies are given?15Principle of maximum libertyOwners can do whatever they like with their property, provided it does not interfere with other’ property or rightsThat is, you can do anything you like so long as it doesn’t impose an externality (nuisance) on anyone elseWhat can an owner do with his property?16What things can be privately owned?Private goods are privately owned, public goods are publicly providedWhat can owners do with their property?Maximum libertyHow are property rights established?(Examples to come)What remedies are given?Injunctions when transaction costs are low; damages when transaction costs are highSo, what does an efficient property law system look like?17Up next: applicationsBut first: an experiment18Each person given a personal value for a poker chipAmount you can sell it back to me for (real money)Purple chip is worth your number, red chip is worth 2 x your numberEach person can only sell back one chipTake 1: buyer’s and seller’s values are common knowledge (nametags)Take 2: private information(each player knows his threat point, but not his opponent’s)Experiment: Coasian bargaining19Take 3: uncertaintyIf seller keeps chip, it’s worth 2 x die roll ($2-$12, EV $7)If buyer gets chip, it’s worth 3 x die roll ($3-$18, EV $10.50)Can’t sell for conditional price
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