Augmenting the Value of Ownership by Protecting it Only Partially: The Market-Overt Rule Revisited

Abstract

This article analyzes alternative rules for settling conflicts between right owner and a bona fide purchaser. The optimal rule, so it is argued, is the one which maximizes the expected value of the ownership right, given the risk of right violation. In order to maximize this value, one must seek to both mitigate the risk of right violation and augment a potential buyer's willingness to pay for the right. The analysis specifies the relevant parameters that define which rule is optimal in given circumstances, and proves that there are cases in which the value of the ownership right is maximized if the owner`s right is only partially protected against innocent third parties. Two prevailing notions are challenged: first, that the market-overt rule necessarily induces buyers to invest fewer resources in prepurchase precautions, and second, that a buyer's willingness to pay is unaffected by the choice of the legal rule.

JEL Classification: K11