Loss Aversion and Involuntary Transfers of Title

Abstract

In some special but frequently occurring situations, such as adverse possession, eminent domain, regulatory takings, and taxation, the law allows, or effects, involuntary transfers of rights. Property belonging to one person shifts to another even though the former owner has not relinquished his claim. These involuntary reallocations of rights raise issues of efficiency. Scholars looking at law through an economic lens have made the positive claim that the common law is efficient and have advanced the normative claim that the law should be efficient. The purpose of this essay is to show how the application of results from psychological experiments can enhance both the positive and normative economic analysis of law. On the positive front, the notion of loss aversion may, for example, help us to understand the adverse possession and takings doctrines. In the normative domain, the experiments expose an additional limitation on the application of the Coase theorem, suggest some improvements to the law of just compensation, and indicate that some modes of legal change may be better than others.

Keywords: Endowment Effect, Loss Aversion, Adverse Possession, Takings, Just Compensation, Taxation, Private Property, Coase Theorem