NBER WORKING PAPER SERIES ECONOMIC ANALYSIS OF PROPERTY LAW Steven Shavell Working Paper 9695 http://www.nber.org/papers/w9695 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2003 Research support from the John M. Olin Center for Law, Economics, and Business is gratefully acknowledged. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by Steven Shavell. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including ©notice, is given to the source. Economic Analysis of Property Law Steven Shavell NBER Working Paper No. 9695 May 2003 JEL No. H4, K2, K11, L5 ABSTRACT This part deals with the basic elements of property law. I begin in chapter 7 by examining the fundamental question of what justifies the social institution of property, that is, the rationale for the rights that constitute what we commonly call ownership. I also discuss examples of the emergence of property rights. Then I consider a number of important issues about property rights. In chapter 8, I inquire about the division of property rights (property rights may be divided contemporaneously, over time, and according to contingency). In chapter 9, I study a variety of issues about the acquisition and transfer of property, including the discovery of unowned or lost property, registration systems for transfer of property, and the transfer of property at death. In chapter 10, I investigate “externalities” and property -- problems concerning cooperation and conflict in the use of property, together with the resolution of such problems through bargaining and legal rules. In chapter 11, I discuss public property; here I address the question of why the state should own property, and also the manner of state acquisition of property through purchase or by the exercise of powers of eminent domain. Finally, in chapter 12, I analyze the special topic of intellectual property. Steven Shavell Harvard Law School 1575 Massachusetts Avenue Hauser Hall 508 Cambridge, MA 02138 and NBER [email protected] Table of Contents Economic Analysis of Property Law (part of Foundations of Economic Analysis of Law) Chapter 7. Definition, Justification, and Emergence of Property Rights 1. Property Rights Defined 2. Justifications for Property Rights 3. The Emergence of Property Rights Chapter 8. Division of Property Rights 1. Division of Rights Described 2. Social Advantages and Disadvantages of Division of Possessory Rights 3. Social Advantages and Disadvantages of Separation of Possessory Rights from Rights to Transfer Possessory Rights 4. The Socially Optimal Division of Property Rights, Their Actual Division, and the Law Chapter 9. Acquisition and Transfer of Property 1. Acquisition of Unowned Property 2. Loss and Recovery of Property 3. Sale of Property -- In General 4. Registration Systems and Sale and Theft of Property 5. Sale and Theft of Property in the Absence of a Registration System 6. Constraints on the Sale of Property Imposed by the State 7. Gifts 8. Transfer of Property at Death: Bequests 9. Control of Property after Death: The “Dead Hand” 10. Involuntary Transfer of Property: Adverse Possession Chapter 10. Conflict and Cooperation in the Use of Property: The Problem of Externalities 1. Notion of External Effects in the Use of Property 2. Socially Optimal Resolution of External Effects 3. Resolution of Externalities Through Frictionless Bargaining 4. Why Bargaining May Not Occur and, If It Does, Why It May Fail To Result in Mutually Beneficial Agreements 5. Resolution of External Effects Through Legal Rules in the Absence of Successful Bargaining 6. Resolution of External Effects Through Legal Rules Given the Possibility of Bargaining Chapter 11. Public Property 1. Justifications for Public Property 2. Acquisition of Property by the State: By Purchase and by Power of Eminent Domain Chapter 12. Property Rights in Information 1. Information of Repeat Value 2. Other Types of Information 3. Information of Value as a Label Summary Table of Contents Foundations of Economic Analysis of Law (forthcoming 2003, Harvard University Press) Chapter 1. Introduction Part One. Accident Law Chapter 2. Liability and Deterrence: Basic Theory Chapter 3. Liability of Firms Chapter 4. Extensions of the Basic Theory Chapter 5. Liability, Risk-bearing, and Insurance Chapter 6. Liability and Administrative Costs Part Two. Property Law Chapter 7. Definition, Justification, and Emergence of Property Rights Chapter 8. Division of Property Rights Chapter 9. Acquisition and Transfer of Property Chapter 10. Conflict and Cooperation in the Use of Property: The Problem of Externalities Chapter 11. Public Property Chapter 12. Property Rights in Information Part Three. Contract Law Chapter 13. Overview of Contracts Chapter 14. Contract Formation Chapter 15. Production Contracts Chapter 16. Other Types of Contract Part Four. Litigation and the Legal Process Chapter 17. Basic Theory of Litigation Chapter 18. Extensions of the Basic Theory of Litigation Chapter 19. General Topics on the Legal Process Part Five. Public Law Enforcement and Criminal Law Chapter 20. Deterrence with Monetary Sanctions Chapter 21. Deterrence with Nonmonetary Sanctions Chapter 22. Extensions of the Theory of Deterrence Chapter 23. Other Functions of Sanctions: Incapacitation, Rehabilitation, Retribution Chapter 24. Criminal Law Part Six. General Structure of the Law Chapter 25. The General Structure of the Law and Its Optimality Part Seven. Welfare Economics, Morality, and the Law Chapter 26. Welfare Economics and Morality Chapter 27. Implications for the Analysis of Law Chapter 28. Income Distributional Equity and the Law *** Chapter 29. Commonly-Raised Questions about Economic Analysis of Law Chapter 7 DEFINITION, JUSTIFICATION, AND EMERGENCE OF PROPERTY RIGHTS In this chapter, I first define property rights, then address the question of their justification, that is, the advantages that might be thought to explain their existence, and last discuss several instances of their emergence. 1. Property Rights Defined I will use the term “property rights” to refer broadly to two subsidiary types of rights, possessory rights and rights of transfer. 1.1 Possessory rights. What are often called possessory rights allow individuals to use things and to prevent others from using them.1 A particular possessory right is a right to commit a particular act or a right to prevent others from committing a particular act.2 On reflection, it can be seen that common property arrangements entail considerable agglomerations of possessory rights, but with certain limitations. The basic notion of ownership embraces a large bundle of possessory rights subject to exceptions. When we say that a person owns a parcel of land, we ordinarily mean that the person can do virtually as he pleases on the land (plant crops on it, build on it, leave it idle) over time and under most contingencies. Also included in the idea of ownership is the right of the owner to prevent others from using what he owns over time and in most contingencies. However, the owner=s possessory rights are not absolute. If a use harms others (maintaining a compost heap that produces noxious odors), it may be proscribed; or, under certain conditions, an owner may be compelled to allow others to use his things (in an emergency, someone might be permitted to seek shelter on his land). Likewise, under rental provisions, the renter of property generally enjoys a large swath of possessory rights, most of those associated with ownership. For example, someone who rents an apartment can use it more or less as he pleases and bar the entry of others, even generally the landlord. But there may be limitations on the renter=s possessory rights that would not be faced by an owner-occupier; typically, a renter of an apartment is forbidden from making major modifications to it. Another example worth noting is property arrangements within enterprises. When a person is working for an enterprise, he will often enjoy certain possessory rights. A person may be able to do a variety of things in the office to which he is assigned and exclude others from it under a fairly wide range of circumstances. 1The subject of the enforcement of these and other rights will be addressed generally in Part Five. Here I shall simply assume that property rights are upheld. 2A completely specified act includes in its description the place, time, and contingency under which it is committed -- for example, digging at a designated location, on Thursday at 4 PM, if it is not raining (the contingency). Chapter 7 - Page 1 In strict logic, and for some purposes, it will be helpful to reduce such common property arrangements to their more basic elements, including the arrays of possessory rights that they encompass. 1.2 Rights of transfer. The other type of right associated with the notion of property rights is a right to transfer a possessory right, that is, the option of a person who holds a possessory right to give it to another person (usually, in exchange for something). Closely related, but distinct, is the right of the recipient subsequently to transfer his possessory right to another person (and for that person to do the same, and so forth). We will assume unless otherwise noted that rights to transfer possessory rights implicitly include these subsequent-order rights to transfer. It is apparent that common property arrangements entail certain rights to transfer possessory rights. The concept of ownership incorporates not only possessory rights, but also rights to transfer these possessory rights; an owner is usually presumed to be able to sell or give away his property, in which case the acquirer obtains all the possessory rights held by the owner, as well as the rights to transfer these rights. Under rental arrangements, however, the renter of a thing may or may not enjoy the right to transfer his possessory rights to another.