Property Rights and Incomplete Contracts: Dealing with Nuisance
ANU WP in Economics and Econometrics 308
Posted: 11 Sep 1996
Date Written: August 8, 1996
A model of externalities with sequential location choice is developed. The first mover decides on location before it knows the identity of the second mover. Joint location leads to a negative externality. The court, having limited information, allocates property rights over the externality based on the timing of location. Sufficient conditions are presented supporting the "coming to the nuisance" doctrine. This doctrine is not always supported: we characterize cases where greater social surplus may be generated by giving property rights to the second mover. A sufficient condition is presented guaranteeing optimality for any property rights allocation. It is also demonstrated that allocating property rights on the basis of stand-alone benefits does not guarantee efficiency.
JEL Classification: K11, D23, C78, H23
Suggested Citation: Suggested Citation