Bounded Rationality and the Theory of Property

38 Pages Posted: 22 Feb 2018 Last revised: 23 Feb 2018

Date Written: February 13, 2018

Abstract

Strong, property rule protection – implemented via injunctions, criminal sanctions and supercomepnsatory damages – is a defining aspect of property. What is the theoretical justification for property rule protection? The conventional answer has to do with the alleged shortcomings of the weaker, liability rule alternative: It is widely held that liability rule protection – implemented via compensatory damages – would interfere with efficient exchange and jeopardize the market system. We show that these concerns are overstated and that exchange efficiency generally obtains in a liability rule regime. But only when the parties are perfectly rational. When the standard rationality assumption is replaced with a more realistic, bounded rationality assumption, liability rules no longer support exchange efficiency. Bounded rationality thus emerges as a foundational element in the theory of property.

Keywords: Bounded rationality, Property rules, Liability rules, Coase Theorem

Suggested Citation

Bar-Gill, Oren and Persico, Nicola, Bounded Rationality and the Theory of Property (February 13, 2018). Notre Dame Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3123157

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Nicola Persico

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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