Property and Property Rules

81 Pages Posted: 27 Dec 2004


This Article builds on the literature generated by Calabresi and Melamed's framework for protecting entitlements through property and liability rules. Pointing to the gap between academic commentators' conclusions that liability rules are superior in most circumstances and the reality that property rules overwhelmingly predominate in the law, the Article offers a theory of the advantages of property rules that is based on information costs. The starting point for this theory is the observation that assets are heterogeneous in ways that are economically significant but costly to identify and value; liability rules inevitably involve some need for an official to make such valuations. The Article then argues that the preference for liability rules rests on certain convenient but overly simple assumptions that elide the costs of producing information about assets and activities.

Second, this Article explores the natural pairing between property rules and owners' rights to exclude others from their property. The "exclusion strategy" for protecting property rights relies on simple on/off signals such as the boundary around a parcel of land to communicate rights and duties to the rest of the world. Within this protected zone, owners have open-ended choices of how to invest in or consume the asset. This Article shows how pairing property rules with an exclusion strategy has advantages that stem from saving information costs, deterring opportunism by potential takers, and discouraging owners from engaging in wasteful self-help. Finally, this Article shows how the information-cost theory illuminates the connection between property rule protection and traditional notions such as residual claimancy and property in the sense of an in rem right to a thing.

Keywords: Property, Property Rules, Liability Rules, Exclusion, Information Cost, Valuation, Bounded Rationality, Residual Claim

JEL Classification: D81, D83, K10, K11, K13

Suggested Citation

Smith, Henry E., Property and Property Rules. Available at SSRN:

Henry E. Smith (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

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