Property Rules, Liability Rules and Externalities

Journal of Public Finance and Public Choice, Forthcoming

22 Pages Posted: 10 Dec 2007

See all articles by Antonio Nicita

Antonio Nicita

University of Siena - Department of Economics

Matteo Rizzolli

LUMSA University

Abstract

In this paper we argue that traditional explanations of the dichotomisation of property rules and liability rules are somehow misleading, since they tend to neglect the evolutionary complementarity between the two rules in a world of incomplete property rights characterised by sizeable ex-ante transaction costs in rights' definition. When rights are a complete bundle of well-defined uses, the application of a property rule reaffirm and reinforce the correlation between rights and duties. In a world of incomplete rights, externalities over undefined uses call for a court intervention aimed at defining a new property right through either a property rule or a liability rule. Independently of whether new rights are created by property or liability rules, the nature and the extent of future externalities over conflicting undefined uses could generate new processes of rights' definition. The emergence of an externality always implies an evolutionary complementarity between property rules and liability rules whose boundaries actually depend, in alternative legal systems, on the degree of incompleteness of original rights.

Keywords: property rules, liability rules, incomplete rights, externalities

JEL Classification: K10, K11,K12,K13,K14,K21

Suggested Citation

Nicita, Antonio and Rizzolli, Matteo, Property Rules, Liability Rules and Externalities. Journal of Public Finance and Public Choice, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1068623

Antonio Nicita (Contact Author)

University of Siena - Department of Economics ( email )

Piazza S. Francesco, 7
Siena, I-53100
Italy

Matteo Rizzolli

LUMSA University ( email )

Via Pompeo Magno
Roma, Rome 00191
Italy

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