Property Rules and Liability Rules, Once Again

Abstract:     
Calabresi and Melamed published the seminal article on property rules and liability rules in 1972. In recent years new articles presenting rigorous analyses of bargaining incentives have overturned some of the fundamental claims of the Calabresi-Melamed analysis. In particular, the proposition that property rules are socially preferable to liability rules when transaction costs are low appears to be either no longer valid or severely weakened under the new analyses. This paper reexamines the property rule versus liability rule question in light of the contributions of the recent bargaining theory literature. In contrast to this literature, I find that the fundamental propositions of Calabresi-Melamed remain valid, and I extend the framework to provide a more detailed positive economic theory of common law rules. The key contribution of this paper is pointing out the importance of subjective valuations in the analysis of property and liability rules. This allows for a synthesis of Calabresi-Melamed and the bargaining theory literature within an expanded framework.

Number of Pages in PDF File: 73

Keywords: economics of property and liability rules, property rules, liability rules, bargaining incentives, bargaining theory, Calabresi-Melamed propositions

JEL Classification: K13, K19, D00, K00, K12, K13, K14, K40, K49

working papers series