Property and Information

Abstract

One of the significant contributions to modern private law is the information cost theory of property expounded by Professor Henry E. Smith. This theory is derived from the Coase Theorem and is designed to explain why the economy is organized by property concepts (most basically by the right to exclude others), as opposed to contract. In this paper, we argue that the theory is flawed. Prof. Smith presupposes the existence of contract and believes that property is a problem that needs to be explained, In fact, property logically precedes contract and Coase’s transaction-free universe presupposes property endowments.

According to Prof. Smith, conveying and understanding information is costly. Consequently,  there is a tradeoff between the amount of information that can be conveyed and the size of the audience that can understand the message. Contract allows speakers to create complex, finely grained legal rights but they are enforceable against only the very few people who actually contract with the speaker. Property, in contrast, allows speakers to assert simple claims against a very large audience (the “world”).

We argue that stinting on information costs cannot explain the institution of private property. Prof. Smith’s theory is “constative” in nature in the terminology of J.l. Austin. Property is conceived as the cost of “delineating” an already-existing title and the cost to non-owners of interpreting these delineating. In fact, we think these are sunk costs; marginal costs in delineating property do not exist. Furthermore, although Prof Smith claims to be distinguishing between property and contract, he, in fact, implicitly segues between claims to possession (property) and alienation (contracts), conflating delineation by owners with title risk by buyers.

When property is alienated, property language is “performative,” not constative. Alienation changes the Hohfeldian legal present and does not just report it. Models offered by Prof. Smith to explain the trade-off between property and contract are examined and found wanting.

Keywords: Property, contract, Coase theorem, law and economics, real property, jurisprudence