Exchange Efficiency with Weak Property Rights

Abstract:     
We show that the first welfare theorem obtains independently of the strength of property rights protection. In an exchange setting, a large class of legal rules (what we call generalized liability rules) are exchange-efficient. Included in this class are property rules (generalized liability rules with very large damages Ds), standard liability rules (generalized liability rules with Ds that track the owner's valuation), and even rules which afford possessory interests only very weak protection (generalized liability rules with very small Ds). This result corrects a previous misconception in the literature, and yields the provocative conclusion that strong property rights are not required for exchange efficiency.

Number of Pages in PDF File: 45

Keywords: property rules, liability rules, efficiency

JEL Classification: K11

working papers series