Paul M. Goldbart and Ian Ayres
Department of Physics
University of Illinois
Yale Law School
New Haven, CT
To appear in Mich. Law Rev., vol. 100, p. 1
(Centenary Volume, 2001) goldbart@uiuc.edu
w3.physics.uiuc.edu/~goldbart


Property rules and liability rules

Concerns of judges

Central aims

Nuisance disputes

Options view of liability rules

Analyzing liability rules

Practical advice for courts
 decoupling allocational & distributional concerns
 choosing among liability rules


Property rules: protect by deterrence

Liability rules: protect by compensation

Example: Abbott breaks Costello’s arm
 Intentionally
 focus on taker’s welfare (a criminal offence)
 traditionally protect via a property rule
 Through negligence
 focus on takee’s welfare (compensatory damages)
 traditionally protect via a liability rule


Property rules are not efficient
 Example: Laurel steals Hardy’s hat
 Property rule: Hardy can sue to recover hat ( replevin )
 Liability rule: can also sue for value of hat ( trover )
 Advantage if hat is worth $10 to Laurel, $5 to Hardy
 Example: Barney holds over in Fred’s apartment
 Fred can sue to for trespass
 or to force Fred to rent for another year

Goal of liability rules:
 Add efficiency by compensating initial entitlement holder for transfer of entitlement (goes beyond mere deterrence)


Traditional view:
 identity of the initial entitlement holder
 compensation as deterrence

Modern view:
 identity of the more efficient chooser
 decouple allocative and distributional concerns
 liability rules: a means by which an imperfectly informed court can delegate choice to private litigants thus harnessing their superior information


Expand and simplify classes of liability rules that courts have at their disposal

Provide guidance in selecting…
 class maximizing ex post allocational efficiency
 member of class with best distributional attributes
(equity, ex ante investment incentives)

Focus on nuisance dispute settings


A/c noise reduced value of adjacent residence
 Estancias Dallas Corp. v. Shultz (Tex. App. 1973)

Hotel addition obstructed view of adjacent hotel
 Fontainbleu Hotel v. Twenty-Five Twenty-Five
Inc. (Fl. 1959)

Dog-track lights interfered w/ drive-in movie theater
 Amphitheaters, Inc. v. Portland Meadows (Or. 1948)

Pollution from Con Ed plant disrupted new car preparation business
 Copart Indus. v. Con. Ed. Co. (N.Y. 1977)


What courts might do in nuisance disputes
 E.g. Boomer v. Atlantic Cement (N.Y. 1970)
 Resident/Plaintiff (Boomer): discomforted by pollution
 Polluter/Defendant (Atl. Cem.): factory operator

Prior to Calabresi & Melamed (’72):
 Rule 1 : nuisance / injunction on Pol (stop!)
 Property rule
 Rule 2 : nuisance / Pol pays damages to continue
 Liability rule
 Rule 3 : not a nuisance / Pol continues
 Property rule


After Calabresi & Melamed (’72):
 Rule 1 : nuisance / injunction on Polluter (stop!)
 Property rule
 Rule 2 : nuisance / Pol pays Res dam’s & continues
 Liability rule
 Rule 3 : not a nuisance / Polluter continues
 Property rule
 Rule 4 : nuisance? / Res pays Pol dam’s to stop Pol
 Liability rule


Call option
 choice of whether or not to pay a non-negotiated amount to purchase the entitlement
 choice of forcing seller to sell (be paid)


After Morris (’93):
 Rule 1 : nuisance / injunction on Polluter (stop!)
 Property rule: entitlement to Resident
 Rule 2 : nuisance / Pol can pay dam’s & continue
 Liability rule: (initial) entitlement to Res; call option to Pol
 Rule 3 : not a nuisance / Polluter continues
 Property rule: entitlement to Polluter
 Rule 4 : nuisance? / Res can pay dam’s to stop Pol
 Liability rule: (initial) entitlement to Pol; call option to Res

Rules 2 vs. 4: Who chooses (to pay)?


Call option
 choice of whether or not to pay a nonnegotiated amount to purchase entitlement
 choice of forcing seller to sell (be paid)

Put option
 choice of whether or not to be paid a nonnegotiated amount to sell entitlement
 choice of forcing buyer to buy (pay)


Call: force to sell

Put: force to buy
 Rule 2 : nuisance / Pol can pay damages to continue
 Liability rule: initial entitlement to Res; call option to Pol
 Rule 4 : nuisance / Res can pay damages to stop Pol
 Liability rule: initial entitlement to Pol; call option to Res
 Rule 5 : nuisance / Pol can require damages & stop
 Liability rule: initial entitlement to Pol; put option to Pol
 Rule 6 : nuisance / Res can require dam’s & allow Pol
 Liability rule: initial entitlement to Res; put option to Res

Rules 2 & 6 v. 4 & 5: Who pays?

 Rule 2 : Entitlement to Resident; call to Polluter
 Boomer v. Atlantic Cement (N.Y. 1970)
 Rule 4 : Entitlement to Polluter; call to Resident
 Spur Indus., Inc. v. Del E. Webb Dev. Co. (Ariz. 1972)
 Rule 6 : Entitlement to Resident; put to Resident
 Thelma builds an encroaching wall on Louise’s land;
Louise can sue Thelma to remove the wall or to force
Thelma to buy the encroached land permanently


Imperfectly informed court

Explore classes of rules

Ex post efficiency as criterion for which rule to adopt?
 several continuous families of rules
 beyond single-chooser rules
 dual-chooser rules and veto power
 higher-order rules

Emerging guidelines for courts


E.g.
Rule 2 : initial ent to Res; call option to Pol
 V
R
 V
P
 P ( V
R
, V
P
) pivot
Q value of
V at which option is
P exercised
V
R
(Res profit,
Pol profit)
( D , V
P

D )
( V
R
, 0 )
V
P damages
Total profit mean
:
V
R

( Q

V
P
)

V
P

( V
P

Q )

V
R
Rule 2 : initial ent to Res; call option to Pol value to Res, Pol ,
P ( V
Q
R
, V
P
)
V
R
D
V
P
Strategy:
1) choose pivot to max total mean profit
2) choose damages to elicit this pivot
( V
R
, 0 )
Q
( D , V
P

D )
V
P

Q

D
D

V
R


( V
P
( V
P


D )
D ) i.e. damages = nonchooser’s mean


E.g.
Rule 6 : initial ent to Res; put option to Res
 V
 jpd (known to all): P ( V
R
, V
P
)
V
P
(Res profit, Pol profit)
Q
Total mean profit :
V
P

( Q

V
R
)

V
R

( V
R

Q )
V
R
( V
R
, 0 )

Q

D
( D , V
P

D )
D

V
P


( V
R
( V
R


D )
D )
V
P i.e. damages = nonchooser’s mean


E.g.
Joint veto :
 initial entitlement to Res; transfer only if Res & Pol agree
 V
R
V
P
P ( V
R
, V
P
)
V
P
( D , V
P

D )
~
Q
( V
R
, 0 )
Total
V
R
 mean profit :

V
P

V
R


( V
P

Q )

(
~
Q

V
R
)

Q

~
Q

D
Q


V
P

D


( V
P

D

V
R


( D


D )
V
R

)
( V
R


( V
P
D )

D ) i.e. implicit eq. for damages
V
R


E.g.
second order :
 initial ent to Res
 call option to Pol
 call back option to Res
Q
2
 value to Resident:
 value to Polluter:
 jpd (known to all):
V
R
V
P
P ( V
R
, V
P
)
(Res profit, Pol profit)
V
P
( D
1
, V
P

D
1
) ( V
R

D
2
, D
2
)
Q
1
( V
R
, 0 )
V
R
As usual, choose…
 pivots to max mean profit
 damages to elicit pivots
(damages are no longer pivot values: strategic takings)




Explore classes of liability rules
 single-chooser, dual-chooser, higher-order
 decouple allocational and distributional concerns
(via continuous families of extensions)
Property rules
 give entitlement to (estimated) higher valuer
 suggested as a general practice, but…
Liability rules
 do better by harnessing private information
 SCR: select more volatile valuer as chooser
 DCR: select lower (mean) valuer as vetoee
 SCR v. DCR: select SCR if diff. in var’s exceeds diff. in means


Correlated distributions
(e.g. visual nuisances)

Higher-order rules
(increased transaction costs)

Numerosity effects