Property rights and liability rules: the ex ante view of the cathedral

Michigan Law Review

Volumn 100, Issue 3, 2001, Pages 601-639

  Bebchuk, Lucian Arye ^a  

^a NONE

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EID: 0042465009     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: 10.2307/1290412     Document Type: Article

References (81)

1. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability; One View of the Cathedral, 85 HARV. L. REV. 1089 (1972). This article is widely viewed as a seminal contribution to law economics and legal theory. See James E. Krier & Stewart J. Schwab, The Cathedral at Twenty-Five: Citations and Impressions, 106 YALE L.J. 2121 (1997) (demonstrating the influence of the article through citation analysis); Carol M. Rose, The Shadow of The Cathedral, 106 YALE L.J. 2175 (1997) ("One View of the Cathedral is now so much a part of the legal canon that it is widely known by the joined names of its two authors. . . .").
2. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability; One View of the Cathedral, 85 HARV. L. REV. 1089 (1972). This article is widely viewed as a seminal contribution to law economics and legal theory. See James E. Krier & Stewart J. Schwab, The Cathedral at Twenty-Five: Citations and Impressions, 106 YALE L.J. 2121 (1997) (demonstrating the influence of the article through citation analysis); Carol M. Rose, The Shadow of The Cathedral, 106 YALE L.J. 2175 (1997) ("One View of the Cathedral is now so much a part of the legal canon that it is widely known by the joined names of its two authors. . . .").
3. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability; One View of the Cathedral, 85 HARV. L. REV. 1089 (1972). This article is widely viewed as a seminal contribution to law economics and legal theory. See James E. Krier & Stewart J. Schwab, The Cathedral at Twenty-Five: Citations and Impressions, 106 YALE L.J. 2121 (1997) (demonstrating the influence of the article through citation analysis); Carol M. Rose, The Shadow of The Cathedral, 106 YALE L.J. 2175 (1997) ("One View of the Cathedral is now so much a part of the legal canon that it is widely known by the joined names of its two authors. . . .").
4. In addition to property rights and liability rules, Calabresi and Melamed also examined an additional form of protection - inalienability rules. See Calabresi & Melamed, supra note 1, at 1111-15. This Article will focus, however, as much of the literature has done, on alienable rights that parties may sell or waive. For an economically oriented analysis of inalienability rules, see Susan Rose-Ackerman, Inalienability and the Theory of Property Rights, 85 COLUM. L. REV. 931 (1985).
5. In addition to property rights and liability rules, Calabresi and Melamed also examined an additional form of protection - inalienability rules. See Calabresi & Melamed, supra note 1, at 1111-15. This Article will focus, however, as much of the literature has done, on alienable rights that parties may sell or waive. For an economically oriented analysis of inalienability rules, see Susan Rose-Ackerman, Inalienability and the Theory of Property Rights, 85 COLUM. L. REV. 931 (1985).
6. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
7. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
8. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
9. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
10. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
11. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
12. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
13. See, e.g., Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 YALE L.J. 703 (1996); Ian Ayres & Paul M. Goldbart, Optimal Delegation and Decoupling in the Design of Liability Rules, 100 MICH. L. REV. 1 (2001); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. CHI. L. REV. 681 (1973); Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996); James E. Krier & Stuart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440 (1995); A. Mitchell Polinsky, Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-Subsidy Approaches, 8 J. LEGAL STUD. 1 (1979) [hereinafter Polinsky, Controlling Externalities]; A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980) [hereinafter Polinsky, Resolving Nuisance Disputes].
14. R.H. Coase, The Problem of Social Cost. 3 J. L. & ECON. 1 (1960).
15. Some of the researchers whose analysis focused on what I term ex post effects also recognized the presence of what I term ex ante effects. In particular, Kaplow and Shavell, supra note 3, at 738-39, discuss how any protection of victims might discourage them from making investments that would reduce the potential harm to them from externality-producing actions. Kaplow and Shavell indicate that such a factor might influence the choice of rule, but they do not attempt to analyze the range of ex ante effects or the conditions under which any given rule would be optimal from an ex ante perspective. Ayres and Talley, supra note 3, also discuss how ex ante considerations might militate against the use of liability rules, but they focus on the beneficial effect that liability rules have on ex post bargaining. Id. at 1083-90.
16. Some of the researchers whose analysis focused on what I term ex post effects also recognized the presence of what I term ex ante effects. In particular, Kaplow and Shavell, supra note 3, at 738-39, discuss how any protection of victims might discourage them from making investments that would reduce the potential harm to them from externality- producing actions. Kaplow and Shavell indicate that such a factor might influence the choice of rule, but they do not attempt to analyze the range of ex ante effects or the conditions under which any given rule would be optimal from an ex ante perspective. Ayres and Talley, supra note 3, also discuss how ex ante considerations might militate against the use of liability rules, but they focus on the beneficial effect that liability rules have on ex post bargaining. Id. at 1083-90.
17. See generally, OLIVER HART, FIRMS, CONTRACTS, AND FINANCIAL STRUCTURE (1995); Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. POL. ECON., 691 (1986); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. POL. ECON. 1119 (1990).
18. See generally, OLIVER HART, FIRMS, CONTRACTS, AND FINANCIAL STRUCTURE (1995); Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. POL. ECON., 691 (1986); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. POL. ECON. 1119 (1990).
19. See generally, OLIVER HART, FIRMS, CONTRACTS, AND FINANCIAL STRUCTURE (1995); Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. POL. ECON., 691 (1986); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. POL. ECON. 1119 (1990).
20. See generally, OLIVER HART, FIRMS, CONTRACTS, AND FINANCIAL STRUCTURE (1995); Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. POL. ECON., 691 (1986); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. POL. ECON. 1119 (1990).
21. Similarly, if pollution were inefficient, any allocation of entitlements would result in no pollution, but different rules would produce different distributions of total value. If Resort were granted the property right, it would not have to pay to induce Factory not to pollute, whereas if Factory received the property right. Resort would have to pay.
22. See generally Kaplow & Shavell, supra note 3, at 757-83.
23. See Lucian A. Bebchuk, Ownership and Exchange (2001) (unpublished working paper) (on file with author).
24. See Calabresi & Melamed, supra note 1, at 1115-16; see also Frank I. Michelman, Pollution as a Tort: A Non-Accidental Perspective on Calabresi's Costs, 80 YALE L.J. 647, 670 (1971) (reviewing GUIDO CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS (1970)).
25. See Calabresi & Melamed, supra note 1, at 1115-16; see also Frank I. Michelman, Pollution as a Tort: A Non-Accidental Perspective on Calabresi's Costs, 80 YALE L.J. 647, 670 (1971) (reviewing GUIDO CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS (1970)).
26. See Calabresi & Melamed, supra note 1, at 1115-16; see also Frank I. Michelman, Pollution as a Tort: A Non-Accidental Perspective on Calabresi's Costs, 80 YALE L.J. 647, 670 (1971) (reviewing GUIDO CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS (1970)).
27. As will be clear to readers, the analysis of this Article can be extended to identify the ex ante effects of additional rules. Some recent work has suggested additional rules based on the use of options. See, e.g., Ian Ayres, The 1998 Monsanto Lecture: Protecting Property with Puts, 32 VAL. U. L. REV. 793 (1998) (reviewing the choice of rule within the put/call framework); Ayres & Balkin, supra note 3, at 729-33 (discussing put options and the way these options might be auctioned); Krier & Schwab, supra note 3, at 471-72 (envisioning a rule granting Factory the option to shut down its activity and collect damages from Resort); Saul Levmore, Unifying Remedies: Property Rules, Liability Rules, and Startling Rules, 106 YALE L.J. 2149, 2153-60 (1997) (suggesting additional rules); RONEN AVRAHAM, MODULAR LIABILITY RULES, (Olin Center for Law and Economics, University of Michigan, Working Paper No. 01-003) (analyzing a group of options-based rules).
28. As will be clear to readers, the analysis of this Article can be extended to identify the ex ante effects of additional rules. Some recent work has suggested additional rules based on the use of options. See, e.g., Ian Ayres, The 1998 Monsanto Lecture: Protecting Property with Puts, 32 VAL. U. L. REV. 793 (1998) (reviewing the choice of rule within the put/call framework); Ayres & Balkin, supra note 3, at 729-33 (discussing put options and the way these options might be auctioned); Krier & Schwab, supra note 3, at 471-72 (envisioning a rule granting Factory the option to shut down its activity and collect damages from Resort); Saul Levmore, Unifying Remedies: Property Rules, Liability Rules, and Startling Rules, 106 YALE L.J. 2149, 2153-60 (1997) (suggesting additional rules); RONEN AVRAHAM, MODULAR LIABILITY RULES, (Olin Center for Law and Economics, University of Michigan, Working Paper No. 01-003) (analyzing a group of options-based rules).
29. As will be clear to readers, the analysis of this Article can be extended to identify the ex ante effects of additional rules. Some recent work has suggested additional rules based on the use of options. See, e.g., Ian Ayres, The 1998 Monsanto Lecture: Protecting Property with Puts, 32 VAL. U. L. REV. 793 (1998) (reviewing the choice of rule within the put/call framework); Ayres & Balkin, supra note 3, at 729-33 (discussing put options and the way these options might be auctioned); Krier & Schwab, supra note 3, at 471-72 (envisioning a rule granting Factory the option to shut down its activity and collect damages from Resort); Saul Levmore, Unifying Remedies: Property Rules, Liability Rules, and Startling Rules, 106 YALE L.J. 2149, 2153-60 (1997) (suggesting additional rules); RONEN AVRAHAM, MODULAR LIABILITY RULES, (Olin Center for Law and Economics, University of Michigan, Working Paper No. 01-003) (analyzing a group of options-based rules).
30. As will be clear to readers, the analysis of this Article can be extended to identify the ex ante effects of additional rules. Some recent work has suggested additional rules based on the use of options. See, e.g., Ian Ayres, The 1998 Monsanto Lecture: Protecting Property with Puts, 32 VAL. U. L. REV. 793 (1998) (reviewing the choice of rule within the put/call framework); Ayres & Balkin, supra note 3, at 729-33 (discussing put options and the way these options might be auctioned); Krier & Schwab, supra note 3, at 471-72 (envisioning a rule granting Factory the option to shut down its activity and collect damages from Resort); Saul Levmore, Unifying Remedies: Property Rules, Liability Rules, and Startling Rules, 106 YALE L.J. 2149, 2153-60 (1997) (suggesting additional rules); RONEN AVRAHAM, MODULAR LIABILITY RULES, (Olin Center for Law and Economics, University of Michigan, Working Paper No. 01-003) (analyzing a group of options-based rules).
31. As will be clear to readers, the analysis of this Article can be extended to identify the ex ante effects of additional rules. Some recent work has suggested additional rules based on the use of options. See, e.g., Ian Ayres, The 1998 Monsanto Lecture: Protecting Property with Puts, 32 VAL. U. L. REV. 793 (1998) (reviewing the choice of rule within the put/call framework); Ayres & Balkin, supra note 3, at 729-33 (discussing put options and the way these options might be auctioned); Krier & Schwab, supra note 3, at 471-72 (envisioning a rule granting Factory the option to shut down its activity and collect damages from Resort); Saul Levmore, Unifying Remedies: Property Rules, Liability Rules, and Startling Rules, 106 YALE L.J. 2149, 2153-60 (1997) (suggesting additional rules); RONEN AVRAHAM, MODULAR LIABILITY RULES, (Olin Center for Law and Economics, University of Michigan, Working Paper No. 01-003) (analyzing a group of options-based rules).
32. But see Spur Indus., Inc. v. Del. E. Webb Dev. Co., 469 P.2d 700 (Ariz. 1972) (ordering a cattle feedlots operator to shut down, and the developer of a neighboring retirement community to indemnify the feedlots operator for the costs of moving or shutting down). See generally Krier & Schwab, supra note 3. at 467-70 (discussing in detail the "paradox of rule four"). But see A. Douglas Melamed, Remarks: A Public Law Perspective, 106 YALE L.J. 2209 (1997) (arguing that "Rule 4" remedies are widely used in public law contexts).
33. But see Spur Indus., Inc. v. Del. E. Webb Dev. Co., 469 P.2d 700 (Ariz. 1972) (ordering a cattle feedlots operator to shut down, and the developer of a neighboring retirement community to indemnify the feedlots operator for the costs of moving or shutting down). See generally Krier & Schwab, supra note 3. at 467-70 (discussing in detail the "paradox of rule four"). But see A. Douglas Melamed, Remarks: A Public Law Perspective, 106 YALE L.J. 2209 (1997) (arguing that "Rule 4" remedies are widely used in public law contexts).
34. But see Spur Indus., Inc. v. Del. E. Webb Dev. Co., 469 P.2d 700 (Ariz. 1972) (ordering a cattle feedlots operator to shut down, and the developer of a neighboring retirement community to indemnify the feedlots operator for the costs of moving or shutting down). See generally Krier & Schwab, supra note 3. at 467-70 (discussing in detail the "paradox of rule four"). But see A. Douglas Melamed, Remarks: A Public Law Perspective, 106 YALE L.J. 2209 (1997) (arguing that "Rule 4" remedies are widely used in public law contexts).
35. See Calabresi & Melamed, supra note 1, at 1106-11 (analyzing how different types of transaction costs affect the choice between property rights and liability rules).
36. See, e.g., Calabresi & Melamed, supra note 1, at 1098-1102; Polinsky, Resolving Nuisance Disputes, supra note 3 at 1089-92.
37. See, e.g., Calabresi & Melamed, supra note 1, at 1098-1102; Polinsky, Resolving Nuisance Disputes, supra note 3 at 1089-92.
38. See Calabresi & Melamed, supra note 1, at 1098.
39. See Kaplow & Shavell, supra note 3, at 744; see also Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994) (arguing that the choice of legal rules should not be influenced by distributional considerations because redistributing income through the income tax and transfer systems would be superior).
40. See Kaplow & Shavell, supra note 3, at 744; see also Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994) (arguing that the choice of legal rules should not be influenced by distributional considerations because redistributing income through the income tax and transfer systems would be superior).
41. Indeed, as mentioned earlier, Calabresi and Melamed consider distribution a legitimate objective of legal policy. See Calabresi & Melamed, supra note 1, at 1098-1102, 1110.
42. Id. at 1093-98, 1106-10.
43. Such claims were made in works by scholars associated with the Critical Legal Studies movement. See Mark Kelman, Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 S. CAL. L. REV. 669, 678-95 (1979) (arguing that the price that a party is willing to pay prevent a harm from happening might differ from the price the party will ask for allowing the harm to happen, and analyzing the implications of this phenomenon for the Coase theorem); Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401-21 (1981) (noting the same). Work in behavioral economics and in psychology has shown that initial allocations of entitlements can indeed affect valuations. See, e.g., W. Michael Hanemann et al., Willingness to Pay and Willingness to Accept: How Much Can They Differ?, 81 AM. ECON. REV. 635 (1991); Elizabeth Huffman & Matthew L. Spitzer. Willingness to Pay vs. Willingness to Accept: Legal and Economic Implications, 71 WASH. U. L. Q. 59 (1993) (investigating evidence on the divergence between willingness-to-accept and willingness-to-pay measures of value and exploring the implications of the divergence for analysis in law and economics); Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1329-42 (1990) (reporting experiments showing asking prices to be higher than offer prices).
44. Such claims were made in works by scholars associated with the Critical Legal Studies movement. See Mark Kelman, Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 S. CAL. L. REV. 669, 678-95 (1979) (arguing that the price that a party is willing to pay prevent a harm from happening might differ from the price the party will ask for allowing the harm to happen, and analyzing the implications of this phenomenon for the Coase theorem); Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401-21 (1981) (noting the same). Work in behavioral economics and in psychology has shown that initial allocations of entitlements can indeed affect valuations. See, e.g., W. Michael Hanemann et al., Willingness to Pay and Willingness to Accept: How Much Can They Differ?, 81 AM. ECON. REV. 635 (1991); Elizabeth Huffman & Matthew L. Spitzer. Willingness to Pay vs. Willingness to Accept: Legal and Economic Implications, 71 WASH. U. L. Q. 59 (1993) (investigating evidence on the divergence between willingness-to-accept and willingness-to-pay measures of value and exploring the implications of the divergence for analysis in law and economics); Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1329-42 (1990) (reporting experiments showing asking prices to be higher than offer prices).
45. Such claims were made in works by scholars associated with the Critical Legal Studies movement. See Mark Kelman, Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 S. CAL. L. REV. 669, 678-95 (1979) (arguing that the price that a party is willing to pay prevent a harm from happening might differ from the price the party will ask for allowing the harm to happen, and analyzing the implications of this phenomenon for the Coase theorem); Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401-21 (1981) (noting the same). Work in behavioral economics and in psychology has shown that initial allocations of entitlements can indeed affect valuations. See, e.g., W. Michael Hanemann et al., Willingness to Pay and Willingness to Accept: How Much Can They Differ?, 81 AM. ECON. REV. 635 (1991); Elizabeth Huffman & Matthew L. Spitzer. Willingness to Pay vs. Willingness to Accept: Legal and Economic Implications, 71 WASH. U. L. Q. 59 (1993) (investigating evidence on the divergence between willingness-to-accept and willingness-to-pay measures of value and exploring the implications of the divergence for analysis in law and economics); Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1329-42 (1990) (reporting experiments showing asking prices to be higher than offer prices).
46. Such claims were made in works by scholars associated with the Critical Legal Studies movement. See Mark Kelman, Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 S. CAL. L. REV. 669, 678-95 (1979) (arguing that the price that a party is willing to pay prevent a harm from happening might differ from the price the party will ask for allowing the harm to happen, and analyzing the implications of this phenomenon for the Coase theorem); Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401-21 (1981) (noting the same). Work in behavioral economics and in psychology has shown that initial allocations of entitlements can indeed affect valuations. See, e.g., W. Michael Hanemann et al., Willingness to Pay and Willingness to Accept: How Much Can They Differ?, 81 AM. ECON. REV. 635 (1991); Elizabeth Huffman & Matthew L. Spitzer. Willingness to Pay vs. Willingness to Accept: Legal and Economic Implications, 71 WASH. U. L. Q. 59 (1993) (investigating evidence on the divergence between willingness-to-accept and willingness-to-pay measures of value and exploring the implications of the divergence for analysis in law and economics); Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1329-42 (1990) (reporting experiments showing asking prices to be higher than offer prices).
47. Such claims were made in works by scholars associated with the Critical Legal Studies movement. See Mark Kelman, Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 S. CAL. L. REV. 669, 678-95 (1979) (arguing that the price that a party is willing to pay prevent a harm from happening might differ from the price the party will ask for allowing the harm to happen, and analyzing the implications of this phenomenon for the Coase theorem); Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401-21 (1981) (noting the same). Work in behavioral economics and in psychology has shown that initial allocations of entitlements can indeed affect valuations. See, e.g., W. Michael Hanemann et al., Willingness to Pay and Willingness to Accept: How Much Can They Differ?, 81 AM. ECON. REV. 635 (1991); Elizabeth Huffman & Matthew L. Spitzer. Willingness to Pay vs. Willingness to Accept: Legal and Economic Implications, 71 WASH. U. L. Q. 59 (1993) (investigating evidence on the divergence between willingness-to-accept and willingness-to-pay measures of value and exploring the implications of the divergence for analysis in law and economics); Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1329-42 (1990) (reporting experiments showing asking prices to be higher than offer prices).
48. For an analysis of the effects of property rights and liability rules on the division of value in disputes between patent-holders and second-stage inventors infringing on these patents, see Mark Schankerman & Suzanne Scotchmer, Damages and Injunctions in Protecting Intellectual Property, 32 RAND J. ECON. 199 (2001).
49. This assumption is similar to the standard assumption made in the incomplete contracts literature that parties' ex ante investments are noncontractible. See, e.g., HART, supra note 6.
50. F'(x) = 1.
51. F'(x) = 1.
52. This result is similar to the standard result in the analysis of the standard hold-up problem: when the value that a party A produces can be expected to become subject to a hold-up by party B, party A will underinvest in enhancing this value. See, e.g., HART, FIRMS. CONTRACTS, supra note 6, at 39-42.
53. F'(x) = 1.
54. F'(x) = 1.
55. This result is similar to those results in the law and economics literature showing that, in some contexts, compensating a party for a value that is not going to be in fact realized might lead to overinvestment. For example. Steve Shavell has shown that the expectation damages remedy in contracts will lead to overinvestment in reliance. The relying party will disregard the fact that its investment would not produce social value in the event that the contract is breached because it would be compensated by the other side. See Steven Shavell. Damage Measures for Breach of Contract, 11 BELL J. ECON. 466 (1980). Similarly, Robert Cooler and Louis Kaplow have suggested that full compensation for government takings leads to overinvestment because parties disregard the fact that their investments might not produce social value in the event that their property is taken by the government. See Robert Cooler, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1 (1985); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509 (1986).
56. This result is similar to those results in the law and economics literature showing that, in some contexts, compensating a party for a value that is not going to be in fact realized might lead to overinvestment. For example. Steve Shavell has shown that the expectation damages remedy in contracts will lead to overinvestment in reliance. The relying party will disregard the fact that its investment would not produce social value in the event that the contract is breached because it would be compensated by the other side. See Steven Shavell. Damage Measures for Breach of Contract, 11 BELL J. ECON. 466 (1980). Similarly, Robert Cooler and Louis Kaplow have suggested that full compensation for government takings leads to overinvestment because parties disregard the fact that their investments might not produce social value in the event that their property is taken by the government. See Robert Cooler, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1 (1985); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509 (1986).
57. This result is similar to those results in the law and economics literature showing that, in some contexts, compensating a party for a value that is not going to be in fact realized might lead to overinvestment. For example. Steve Shavell has shown that the expectation damages remedy in contracts will lead to overinvestment in reliance. The relying party will disregard the fact that its investment would not produce social value in the event that the contract is breached because it would be compensated by the other side. See Steven Shavell. Damage Measures for Breach of Contract, 11 BELL J. ECON. 466 (1980). Similarly, Robert Cooler and Louis Kaplow have suggested that full compensation for government takings leads to overinvestment because parties disregard the fact that their investments might not produce social value in the event that their property is taken by the government. See Robert Cooler, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1 (1985); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509 (1986).
58. F'(x) = 1.
59. F. As a result, the overinvestment under the FP rule will be less severe than under the FL rule.
60. R'(x) = 1.
61. F). See supra Section III.C.
62. R. Resort would receive this payment and willingly shut down. See also supra Section III.B.
63. R'(x) = 1.
64. Note that, whereas the total value with which Resort will end up under the RP rule may exceed that under the RL rule, Resort's incentive to invest in enhancing the value of its activity under the RL rule is stronger on the margin than under the RP rule. The reason for this is similar to the one given earlier for why Factory's incentive to invest in enhancing the value of its activity is higher under the FL rule than under the FP even though Factory's final value is higher under the latter rule. See supra note 29 and accompanying text.
65. Recall that the entitlement that Factory would enjoy represents the freedom to engage in its activity, i.e., to pollute the river. Consequently, Factory can transfer the entitlement and thereby extract value from Resort only if Factory completely shuts down its polluting activity. This can occur only in scenario R, in which Factory should shut down its activity anyway. In scenario FR, Factory would not be willing to shut down its activity and thus could not transfer its entitlement and extract value from Resort, whether under the FP rule or the FL rule. By contrast, the entitlement that Resort would enjoy represents simply the freedom from pollution, such that transfer of the entitlement would not require Resort to shut down its activity but merely to suffer simultaneously the presence of pollution. Thus, granting the entitlement to Resort with property-right protection would enable it to extract value from Factory not only in scenario F, in which Resort would shut down, but also in scenario FR, in which Resort would continue to operate despite the pollution.
66. R > H in the event that scenario R takes place.
67. R'(x) = 1, which is the condition defining the socially optimal level of investment. See supra note 30.
68. F'(y) = -1.
69. R'(y) = -1. 41. See supra Section III.A.
70. This result is similar to the result in the economic analysis of torts showing that, when courts make injurers strictly liable for victims' losses, injurers will invest optimally in precautions and victims will make no investment in precautions. See, e.g., STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW, ch. 2 (1987).
71. R > H. In that situation, an increase in H would raise the damages to Resort from Factory's pollution and thus would raise the surplus that would be generated (and partly captured by Factory) from Factory's shutting down its activity.
72. R > H. See supra Section III.C.
73. See Ayres & Talley, supra note 3; Calabresi & Melamed, supra note 1; Kaplow & Shavell, supra note 3. Kaplow and Shavell conclude that there is a prima facie case for favoring liability rules over property rights, id. at 721, but they list several factors (including investments by victims in reducing potential harm) that might still make property rights desirable.
74. See Ayres & Talley, supra note 3; Calabresi & Melamed, supra note 1; Kaplow & Shavell, supra note 3. Kaplow and Shavell conclude that there is a prima facie case for favoring liability rules over property rights, id. at 721, but they list several factors (including investments by victims in reducing potential harm) that might still make property rights desirable.
75. See Ayres & Talley, supra note 3; Calabresi & Melamed, supra note 1; Kaplow & Shavell, supra note 3. Kaplow and Shavell conclude that there is a prima facie case for favoring liability rules over property rights, id. at 721, but they list several factors (including investments by victims in reducing potential harm) that might still make property rights desirable.
76. See supra note 11 and sources cited therein.
77. See Table 7, supra, for a summary of the effects of the four rules on ex ante investments.
78. Problems of this type should be familiar to students of law and economics from other contexts. For an excellent discussion, see Cooter, supra note 27. Although Cooter recognizes that this problem arises in a number of contexts, he does not notice that, in the presence of ex ante investments, it also arises in the context studied in this Article. Indeed, Cooter affirmatively suggests that such a problem does not arise in the context of nuisance disputes when courts use injunctive relief, i.e., property-right protection. See id. at 27-28.
79. See supra Section IV.B(2)(ii) (discussing Factory's investment in enhancing its value under the RL rule); see also supra Section IV.D(2)(ii) (discussing Factory's investment in harm reduction under the RL rule).
80. See supra Section IV.C.(2)(iv) (discussing Resort's investment in enhancing its value under the FL rule); see also supra Section IV.D(2)(iv) (discussing Resort's investment in harm reduction under the FL rule).
81. The importance of private reporting often comes up as one of the relevant considerations in choosing between private and public enforcement of law. See, e.g., Steven Shavell, The Optimal Structure of Law Enforcement, 36 J.L. & ECON. 255, 267 (1993). At first glance, the problem might be solved by providing Resort with a financial reward for accurately reporting the magnitude of harm. As Shavell pointed out, however, when Factory's fine exceeds Resort's financial reward, Factory might induce Resort not to report by offering a side payment intermediate between the fine to Factory and Resort's financial reward for reporting.