Ex Ante Investments and Ex Post Externalities

49 Pages Posted: 16 Jan 2002 Last revised: 5 May 2009

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Date Written: 2002


Whenever the use of an asset by one party imposes an externality on another party's use of an asset, entitlements must be allocated. Does an upstream firm have a right to use a river's water or does a downstream firm have a right not to have the water used? And if the downstream firm is to be protected, should the protection come in the form of a property right or a liability rule? This paper focuses on how the allocation of entitlements affects ex ante investments and actions. Even when ex post bargaining is easy, the ex post allocation of entitlements, by affecting the distribution of ex post value, can have significant efficiency effects ex ante. By identifying the ex ante effects of alternative rules, the analysis provides a framework for determining allocations of entitlement that would perform best from the perspective of ex ante efficiency. As far as ex ante effects are concerned, liability rules are not generally superior to property rights. The analysis has implications for a broad range of legal and policy questions.

Keywords: externalities, property rights, liability rules, ex ante investments, regulation

JEL Classification: D62, K10, K11

Suggested Citation

Bebchuk, Lucian A., Ex Ante Investments and Ex Post Externalities (2002). Harvard Law and Economics Discussion Paper No. 397, Available at SSRN: https://ssrn.com/abstract=297091 or http://dx.doi.org/10.2139/ssrn.297091

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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