Audits, Markets, and Patents

17 Pages Posted: 6 Jun 2019 Last revised: 2 Aug 2019

Date Written: May 20, 2019


The valuation of illiquid assets is a challenge across many areas of law, from tax to torts to takings to intellectual property. The most common approaches to the problem are state assessment and self-assessment. In a state assessment system, some actor or body employed or deputized by the government — such as an assessor, a jury, or a judge — estimates the value of the asset in question, and that state assessment becomes binding (generally after an appeals process has run its course). Examples of state assessment include local property tax valuations, jury awards in tort cases, court-ordered compensation for takings, and the process for patent and copyright holders to obtain compensation from the federal government when it uses their intellectual property without a license. In a self-assessment system, asset owners or taxpayers report their own valuations of the item in question. Rather than relying on scout’s honor, authorities generally subject those self-assessed valuations to random or quasi-random audits and then impose penalties if the self-assessment appears to be self-serving. Examples of self-assessment abound in the federal tax context, including the valuation of in-kind income, noncash charitable contributions, goods and services transferred among affiliated business entities, and gifts and inheritances subject to wealth transfer taxes.

Audits are not the only way that governments can test the accuracy of reported valuations in a self-assessment system. An alternative to an “audit test” is a “market test.” In the context of a self-assessed property tax, for example, a market test would allow anyone to purchase the property for the self-assessed price. Following in the footsteps of economist Arnold Harberger, a number of scholars of law and economics have developed detailed and innovative market-test proposals, including Saul Levmore, Lee Fennell, and — most recently — Eric Posner and Glen Weyl.

This Essay revisits the tradeoff between state assessment and self-assessment as well as the choice between market tests and audit tests as mechanisms for policing self-assessment. It observes that a combination of audits and markets will work best when the private sector can gather and process information about valuation more efficiently than the public sector can, and when overvaluation, not undervaluation, is the primary valuation-related concern. These conditions appear to apply to government patent buyouts. The Essay concludes that a hybrid audit/market regime will likely represent an important improvement over existing patent buyout proposals.

Keywords: property tax, self assessment, audits, market test, patent buyouts

JEL Classification: K10, K11, K34, O34

Suggested Citation

Hemel, Daniel Jacob, Audits, Markets, and Patents (May 20, 2019). 87 University of Chicago Law Review Online 78 (2019) , Available at SSRN:

Daniel Jacob Hemel (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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