Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights

Abstract

The law of every jurisdiction defines a set of well-recognized forms that property rights can take, and burdens the creation of property rights that deviate from those conventional forms. In this respect, property law differs from contract law, which generally leaves parties free to craft contractual rights in any form they wish.

The law's restrictions on the forms of property rights have recently been rationalized as establishing an "optimal standardization" of property rights into a limited number of discrete forms to facilitate communication of the content of those rights to third parties. We argue, in contrast, that the law's limitations on property rights take the form, not of standardization, but rather of regulation of the notice required to establish different types of property rights. These limitations serve, not to facilitate communication of the content of rights, but to facilitate verification of ownership of the rights offered for conveyance. Property law generally addresses this verification problem by presuming that all property rights in an asset are held by a single owner, subject to the exception that a division of rights is enforceable if there is adequate notice to subsequent owners. Because the benefits of divided property rights are often low and the costs of verifying those rights are often high, property law takes an unaccommodating approach to all but a few basic categories of partial property rights.

In the course of developing our analysis, we offer a simple and clear characterization of the distinction between property rights and contract rights. We explore the varieties of verification rules by which the law establishes the forms of notice required to establish property rights, and illustrate the close relationship between verification rules and the forms of property rights that those rules support. We set out conditions for assessing the efficiency of alternative property rights regimes, and discuss the extent to which that efficiency calculus is actually reflected in property law. We survey some of the principal categories of partial property rights - including security interests, legal entities, coordinating rights in real and personal property, and intellectual property - showing how the structure of those rights reflects limits on the feasible verification rules. We also seek to clarify the relationship between property rights and contract rights, the connection between property rights and property rules, and the limits on specific performance as a remedy in contract.

Keywords: property, contract, property rights, contract rights, verification, notice, numerus clausus

JEL Classification: K0, K1