Protecting Property with Puts

Abstract

In the Calabresi and Melamed framework, liability rules are analogous to "call" options in that a potential taker is given the choice of taking and paying court determined damages. But it is possible to extend the 4 rule framework to include 2 additional "put option" (or "forced purchase") rules. A "put option" rule gives the initial entitlement holder the choice of retaining the entitlement or the choice of being paid to cede the entitlement. Previous analysts of the classic Boomer and Spur opinions have focused on who pays whom but have often ignored the equally important question of who decides whether a payment will be made. The dual thesis of this of this article is that put options are a traditional part of the common law and that they should remain so.

Contrary to accepted wisdom, the common law does use "put options" -- the right to force a non-consensual purchase -- as a mechanism for protecting entitlements. 1) If Calabresi steals Melamed's watch, Melamed has the option of suing to recover the watch (replevin) or suing to receive the watch's value (trover). 2) If Calabresi is a holdover tenant in Melamed's apartment, Melamed has the option of suing to enjoin Calabresi's continuing trespass or (at least in some jurisdictions) suing to force Calabresi to rent for up to an entire additional year. 3) If Calabresi builds an encroaching wall on Melamed's land, Melamed has the option of suing to force Calabresi to remove the wall or suing to force Calabresi to permanently buy the encroached land. In each of these examples, after Calabresi takes Melamed's entitlement, the common law gives Melamed a put option -- the option to choose court-determined damages (for permanently ceding the entitlement to the defendant) or injunctive relief (to require the entitlement). Surprisingly, however, the victims of nuisance are not routinely given a similar put option. If Calabresi pollutes Melamed's land, Melamed is not given an analogous put option. Indeed, the famed Boomer decision gives this choice to the polluter instead of the adjoining residents. This article suggests that put options at times should be used to protect property in the nuisance context as well.

JEL Classification: Q20, Q30