Rethinking the Laws of Good Faith Purchase

Abstract:     
This article is a comparative economic analysis of the disparate doctrines governing the good faith purchase of stolen or misappropriated goods. Good faith purchase questions have occupied the courts and commentators of many nations for millennia. We argue that prior treatments have misconceived the economic problem. An owner of goods will take optimal precautions to prevent theft if she is faced with the loss of her goods; and a purchaser will make an optimal investigation into his seller’s title if the purchaser is faced with the loss of the goods. An owner and a buyer cannot both be faced with the full loss, however. The good faith purchase question thus presents a problem of “double marginalization,” and as with these problems generally, it cannot be solved in a first best efficient way. However, the laws of the major commercial nations are less efficient than they could be. This is particularly true of current U.S. law: In the U.S., an owner always can recover stolen goods, which reduces her incentive to take optimal precautions but creates first best incentives to search for stolen goods. In turn, a buyer of those goods makes a suboptimal investigation into title because the owner may never find him. We propose that the owner should be permitted to recover goods only if she satisfies a negligence standard set at the socially optimal precaution level (which we argue is feasible). This would increase her incentive to take precautions while retaining her efficient incentive to search. Since owner search and buyer investigation are complements, our proposal leaves unchanged the buyer’s (suboptimal) incentive to investigate. Also under current law, an owner who voluntarily parts with her goods cannot recover them from a good faith purchaser. This rule reduces the owner’s incentive to search and so reduces the buyer’s incentive to investigate. Thus, we propose that a negligence standard should apply to owners generally. We argue that the verifiability objections to a vague standard of negligence can be satisfied by the specification of rule-like proxies for owner negligence. A comparative analysis of the law of good faith purchase in the leading commercial jurisdictions shows the chaotic nature of the current disparity in treatment of owners and buyers. Since today many stolen goods cross national borders, a generally applicable solution to the good faith purchase issue will further reduce the demand for stolen goods, reduce the incidence of strategic litigation and enhance social welfare.

Number of Pages in PDF File: 65

Accepted Paper Series