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山东政法学院民商法学院讲师,法学博士,山东省高等学校人文社科研究基地(民商事法律与民生研究中心)研究员,兼任山东省法学会民商法学研究会理事、山东省社会稳定研究中心研究员、执业律师。研究方向:民法原理与方法、保险法、社会保险法。曾于《当代法学》、《法学杂志》、《政法论丛》等期刊发表学术论文十余篇,主编或参编《校园侵权》、《债权法教程》、《侵权法教程》等教材专著六部,合译《美国侵权法:实体与程序》一部。

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PROPERTY RULES VS. LIABILITY RULES  

2014-12-09 13:55:02|  分类: 侵权责任 |  标签: |举报 |字号 订阅

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Michael I. Krauss

Professor of Law

George Mason University School of Law

? Copyright 1999 Michael I. Krauss

 

Abstract

All of private law can be seen as rules for the ownership and exchange (forcible

or voluntary) of entitlements. Property Rules and Liability Rules can be seen as

shorthand terms describing two different means of protecting entitlements.

Analysis of the choice between these types of rules provides a useful purchase

on the jurisprudential foundations of a legal system.

JEL categories: K11

Keywords: Property Rule, Liability Rule, Inalienability, Rights, Coase Theorem,

Calabresi

 

1. Introduction

 

To enjoy a legal right means, inter alia, that one will be able to rely on the

protection of governmental agencies in case these rights are encroached upon.

But different types of rights enjoy different degrees of legal protection. The

systematic analysis and resultant taxonomy of protection of rights has been one

of the most important contributions of the law and economics movement to the

understanding of tort and contract law. The elaboration of property rules and

liability rules has been especially useful in enhancing our awareness of what it

means to have a right. In this survey, both the original contribution to this field

and more recent treatments will be discussed, and their jurisprudential

implications occasionally examined.

 

2. The Basic Taxonomy

 

Property Rules

The civilian concept of patrimony is a useful way to approach this subject. A

person’s patrimony is essentially composed of his rights and obligations. If we

focus on the rights side of the equation, we notice that these rights receive

differential degrees of protection.

 

Some rights are fully protected against unwanted takings. Thus, if Jill hears

that Jack plans to take her car, he can typically obtain a court order forbidding

this taking. If Jill has not obtained such an order or if, in violation of the order,

Jack takes her car, Jill can obtain (in addition to appropriate criminal law

punishment of Jack) an order for its restitution. Only if the restitution is

impossible (because, say, Jack has intentionally destroyed the car) will Jill have

to be content with its replacement by money damages. The amount of these

damages will of course be determined by the court: typically, though, damages

will include a punitive element reflecting societal condemnation of Jack’s

action.

 

In an article critical to the evolution of law and economics (Calabresi and

Melamed, 1972), this type of protection of an entitlement was termed a property

rule. The name is intuitively attractive, because property rule protection is

what the man on the street thinks he deserves if he has a property right. Thus,

Jill believes she is immune to claims that Jack may take her car because he

values it more than she does. Presumably Jack can demonstrate the higher

value he attaches to the car by acquiring rights to it from Jill in a

Pareto-superior transaction (that is, a contract). This contract will, by

definition, compensate Jill for any subjective value (over and above the market

price of the vehicle) which she attaches to her car, for the simple reason that

any offer inferior to this value will be declined by Jill.

 

To have a property right (that is, an entitlement protected by a property

rule), then, is to have a right that is in some important way shielded from

felicific or wealth-maximizing social functions. Ronald Dworkin captured the

vital importance of property rule protection when he coined the phrase, ‘rights

trump utility’ (Dworkin, 1975).

 

Liability Rules

Property rules are, however, not the only legal methods used to protect

entitlements. To see this, realize that Jack and Jill engage in risk-creating

behavior every time they leave their premises. When Jack hunts, or drives, or

wheels his cart down an aisle while shopping for groceries, he creates risks for

Jill and others. Yet Jack may NOT be enjoined ex ante from these activities,

even though they probabilistically endanger Jill’s property. Rather, only if and

when Jill’s property is damaged will Jack’s activity be examined ex post to

determine if compensation is required. When such compensation is ordered, it

will typically NOT reflect the subjective value Jill attaches to her damaged

property. Rather, it will reflect the property’s market price, which by definition

underestimates its value to Jill (since she had not chosen to sell the property at

its market-clearing price) (Polinsky, 1980a, p. 1103).

 

3. An Illustration: Intentional but Non-Negligent Externalities in Property

Disputes

 

The externality of environmental pollution, discussed in Coase’s seminal piece

(Coase, 1960), illustrates the ways in which both the owner of an entitlement

and the means of protecting that entitlement might be determined. Suppose

P(laintiff) claims that D(efendant) is polluting P’s holdings. D admits to this

pollution but insists that it is non wrongful. If P and D bring their dispute

before the courts, then even if D’s pollution was not negligent it must be

declared who, as between them, has the favor of the law: may D pollute, or may

P legally object to the pollution? After having answered this question, the court

must then determine how to protect the entitlement it has found.

 

? Thus, suppose the court finds in favor of P. If it enjoined the pollution, this

would be the equivalent of declaring that P possessed an entitlement which

was protected by a property rule. D would be able to continue emitting

pollutants if and only if D and P could come to some agreement whereby P

would waive the judgment (that is, transfer the entitlement to D). The

consideration for this injunction would by definition compensate P for

damages suffered.

 

? On the other hand, the court could find that the D’s pollution was not legal,

but that D could continue to pollute upon payment of court-ordered

damages to P. The court here is in essence imposing the terms of the

post-injunction contract negotiated by the parties in the immediately

preceding example. This is the equivalent of declaring that P’s entitlement

is protected by a liability rule: in effect, the court is condemning P’s land

to suffer a servitude of pollution, and is fixing the price of this servitude

itself. There is no guarantee, of course, that this price fully reflects P’s

subjective damages. Rather, the award typically reflects the market-clearing

loss of value of P’s land.

 

? The court might also determine that D was not illegally polluting: that is,

that D possessed the entitlement to pollute. Typically, this entitlement

would be protected by a property rule: P’s suit would be dismissed, and that

P would have to meet D’s price in a post-judgment transaction if P wished

to oblige D to cease polluting.

 

? Finally, if the procedural rules of the jurisdiction permit holding a plaintiff

liable for damages, the court could also protect D’s claim with a liability

rule. It could recognize D’s right to pollute, then proceed to take it away

from D after awarding D damages payable by P. A court accomplishing this

would essentially be setting the terms of the post-judgment transaction

between P and D imagined in the immediately preceding paragraph. The

payment by P to D would be accompanied by an injunction against further

pollution by D. This would protect D’s entitlement, but only with a liability

rule (Spur Industries v. Del E. Webb Development Co (1972).

 

 

PROPERTY RULES VS. LIABILITY RULES - 玉辉博士 - 玉辉民法研习社

 

 

 

4. Another Illustration: Negligent and Unintentional Externality

 

Most tort suits do not result from a pattern of continuous harms, like the

polloution example above. Even in one-time harm cases, however, the

Calabresi-Melamed taxonomy is useful in understanding the different ways in

which rights might be protected.

 

For example, in a dispute that resulted in a celebrated Supreme Court

decision (LeRoy Fibre Co. v. Chicago, Milwaukee & St. Paul R.R. (1914), it

was conceded that the defendant railroad had negligently allowed sparks to

land on the plaintiff’s land. The railroad claimed, however, that the plaintiff

was negligent in stacking his crops; they were placed on the plaintiff’s own

land but, alleged the railroad, they were located too near the tracks, such that

the damages were therefore much greater than would have otherwise been the

case. This, the railroad claimed, was contributory negligence by the plaintiff

(which under tort rules then in effect would bar plaintiff’s suit).

 

The United States Supreme Court divided in its judgment. The majority

observed that the defendant had not purchased a servitude from the plaintiff,

and concluded that as a matter of law the latter could therefore not be negligent

for planting his own crops on his own land. This is the equivalent of protecting

the plaintiff’s entitlement to plant crops with a property rule. Dissenting Justice

Oliver Wendell Holmes, Jr agreed that, in the absence of a servitude, the

railroad could not enjoin the stacking of crops near its track. But Holmes

insisted that if the farmer’s decision did not maximize joint (farmer-railroad)

output, then the farmer was negligent and could not recover the value of his

destroyed crops. In essence Holmes was protecting the farmer’s entitlement to

plant crops with a liability rule, which under the particular circumstances of the

case might result in no damages being awarded.

 

The LeRoy Fibre case illustrates the close link between liability rule

protection of entitlements and the counter-intuitive bilateral causation concept

which was the raison d’^etre of Coase’s insights (Coase, 1960). In everyday

language, it would be said that the railroad caused the crop loss by the emission

of sparks. But Holmes (and Coase) would assert that, if the farmer was the

cheaper cost avoider of the accident, it was he (and not the railroad) that caused

the loss. Some cases have recognized bilateral causation quite explicitly

(Kansas Pacific Ry v. Brady (1877), p. 386). Entitlement holders who believe

their rights are protected by a property rule typically insist that they are the

victims, not the cause, of damage: otherwise, their rights would be trumped by

utility- or wealth-maximizing constraints, which is contrary to the very notion

of property-rule protection. The Calabresi-Melamed typology highlights the

link between rights language and causal language. To the extent entitlements

are protected by liability rules, rights (and therefore causation) are inherently

contingent; the cause of an injury is the efficient avoider of the injury. The

cheaper-cost avoider of a loss will always be said to have caused the loss if

entitlements are protected by liability rules.

 

5. A Further Complication: Inalienability Rules

 

The choice between these two mechanisms of protection of entitlements

(property and liability rules) will be explored further below. Realize, though,

that in reality the choice is not binary at all. As Calabresi and Melamed pointed

out, and as others have developed (Radin, 1987, p. 8; Rose-Ackerman, 1985,

p. 9), there exists a third protective mechanism: inalienability rules.

An entitlement protected by a property rule may be alienated only by its

holder, while a right subject to a liability rule may be forcibly exchanged when

a third party deems it to be in the interest of a social utility (or wealth) function.

But an inalienability rule provides iron-clad protection against alienation,

including voluntary alienation by the rights-holder himself. Some, but not all,

constitutional rights (for example, in the United States, the right to vote and the

right not to be free from cruel and unusual punishment, but not the

constitutional right to a jury trial), and many corporal entitlements

(entitlements to one’s heart, to one’s legs, but not to one’s hair) are protected

by inalienability rules. Sometimes (for example, in some jurisdictions as

regards blood and kidneys) the inalienability rule is partial only: donation of

the entitlement is allowed while sale is prohibited (Calabresi and Melamed,

1972, pp. 1111-1115). As is the case for property rules, but a fortiori, rights

protected by inalienability rules may not be sacrificed in the name of a social

maximand. The explanation of inalienability rules goes beyond the subject

matter of this encylcopedia entry: suffice it to note that profound jurisprudential

beliefs about the human condition, and about the limits of rationality, underlie

inalienability rule protection.

 

6. Non-Tort Applications

 

Insights gleaned from the Calabresi-Melamed taxonomy have been

implemented with profit in fields other than tort. In contract law, a creditor

(promisee) has an entitlement to the performance of the promise by the debtor

(promisor). If this entitlement is to be enforced with a property rule, specific

performance would be available at the creditor’s option. If, on the other hand,

the entitlement is to be protected only by a liability rule, then specific

performance would not be a creditor’s option - rather (as Justice Holmes once

observed in a famous dictum), the promise to perform would in reality only be

a promise to pay damages adjudicated by a third party, the court, at the debtor’s

option (Kronman, 1978; Schwartz, 1979). And some contractual risks are

apparently protected by inalienability rules, such that their voluntary alienation

will be deemed unconscionable and therefore unenforceable by the courts

(Craswell, 1993).

 

7. Who Should Get an Entitlement, and How Should this Entitlement

be Protected

 

As shown, the property rule/liability rule taxonomy has proven extremely useful

in positive analysis. But beyond understanding what exactly courts are doing,

does the typology provide insights as to how rights ought to be allocated and

protected? In the move from positive to normative analysis, here as in law and

economics generally, explanations are much more controversial.

Note initially, as Coase famously pointed out (Coase, 1960, pp. 2-8), that

if there are no impediments to bargaining, the initial assignment of an

entitlement will not thwart or even (abstracting from wealth effects) influence

its ultimate allocation, which will be efficient .

 

To many, the Coase theorem detachment of initial distribution from final

efficient allocation implies that non-economic motives should determine initial

allocation of entitlements (Frank, 1987; Schwab, 1989). If transaction costs are

high, of course, the initial distribution of the legal entitlement may also be the

final one, and Kaldor-Hicks efficiency would then only be attained if the initial

allocation was to the social-cost-minimizing party. However, the two states of

the world (one in which the initial allocation was to the social-cost-minimizing

party, one in which it was to another party, with high transactions costs

preventing easy assignment) are not Pareto-comparable, and it is therefore

difficult to establish the moral, or even economic (Buchanan, 1987) superiority

of that assignment.

 

More interesting for the purposes of this encyclopedia entry is the question,

assuming it has been decided for some reason to allocate an entitlement to

someone, whether that entitlement should be protected by a property rule or by

a liability rule. The rest of this abstracts from the additional possibility that an

inalienability rule might be appropriate.

 

The conventional law and economics answer to this question is that a

property rule should be chosen if transaction costs are low (in which case the

parties can arguably best establish the relevant values by bargaining after the

assignment of the entitlement), while a liability rule should be chosen if

transaction costs are high (as might be the case if large numbers of parties are

involved either as plaintiffs or defendants, creating risks of free-riding or of

holdouts, if the entitlement is incorrectly assigned from an efficiency

standpoint). Thus, Posner wrote that, where transaction costs are high, the

allocation of resources to their highest-valued uses is facilitated by denying

property right holders an injunctive remedy against invasions of their rights

and instead limiting them to a remedy in damages (Posner, 1972, p. 29).

 

But it has been pointed out (Polinsky, 1980a) that this answer assumes that

while transaction costs between parties are high, information costs for the judge

who determines damages payable (or for the jury, if the jury sets the damages)

are low. If, on the contrary, both transaction costs and judicial assessment costs

are high, there is little reason to believe that protection of an entitlement with

a liability rule will be particularly conducive to efficiency (Polinsky, 1980a, p.

1111; Krier and Schwab, 1995, p. 455). Thus, in the pollution example applied

earlier, if Defendant’s pollution abatement costs were $100,000 and Plaintiff’s

actual damages were $120,000 but were set by the judge (who ignored

idiosyncratic value) erroneously at $90,000, then if transaction costs were high

the defendant would pollute and pay damages rather than abate, even though

abatement is the true social-cost-minimizing result.

 

As implied on several occasions above, there are indeed reasons to believe

that assessment of damages will be incorrect. Judicially determined damages

typically and systematically neglect a plaintiff’s idiosyncratic value or

consumer surplus (the assessment cost of which is prohibitively high in most

cases - there is a strong likelihood that plaintiff would exaggerate such surplus

at trial in order to obtain a windfall). Thus in one famous case in which

Defendant had polluted Plaintiff’s summer home, Judge Learned Hand stated

that ‘A country residence, on which so much is spent to suit the owner’s fancy,

cannot be said to have a [social] value equal to its cost’ (Smith v. Staso Milling

Co.,1927, p. 739). If damages are systematically mis-assessed, then the

economic basis for choosing between property and liability rule protection of

entitlements in high transaction cost situations would disappear.

 

These problems might lead one to believe that, from an efficiency

perspective, property rules (injunctive relief) are no worse than liability rules.

In fact, property rules (which do not require any calculation of the amount of

harm on the part of the court) might possibly be cheaper than liability rules.

Recently it has been argued that arbitrary, Solomonic liability awards might

encourage Coasean trades as well as and more cheaply than detailed efforts to

calculate damage (Ayres, 1995).

 

This argument has been criticized by Kaplow and Shavell (1995), who have

recently offered an additional plea for liability rules (1996). They essentially

reason that liability rules promote at least some comparison of costs and

benefits, forcing one party or the other to compare its opportunity costs to an

amount of damages representing the judge’s best estimate of them. But this best

estimate itself is simply and unpersuasively assumed to be relatively accurate.

These two authors have summed up the choice between property and liability

rules, in the face of transaction and-or assessment costs, as follows:

 

 

PROPERTY RULES VS. LIABILITY RULES - 玉辉博士 - 玉辉民法研习社

 

 

 

Again, there is no particular reason to assume that assessment costs will be

lower than transaction costs. An Austrian approach (questioning the

assumption that state agents can discover information more efficiently than

market processes) argues particularly strongly against such an assumption

(Krauss, 1994). Economic variables may simply be too indeterminate to

advocate on efficiency grounds some fine-tuned academic recommendations

based on simplifying assumptions (G. Schwartz, 1994, p. 444).

 

If these reflections are cogent, then the choice between property and liability

rules as enforcement mechanisms for entitlements may turn on non-economic

variables. Demanders of corrective justice (Coleman, 1992; Krauss, 1992) and

natural attachment of entitlement holders to their rights (Michelman, 1967)

might argue for the priority of property rules in situations where neither rule

has a clear efficiency advantage. Analogously, the case can and has been made

that inalienability rules might be the best way to expand personal liberty

(Arneson, (1992).

 

8. Conclusion

 

The literature describing property rules and liability rules has provided

fascinating insights into the different ways in which tort, contract and property

law protect our entitlements. But the taxonomy, like economic analysis

generally, should not be used on a normative level without caution. There is

nothing in Calabresi’s formulation, or in the Coase theorem which inspired it,

which authorizes using the courts (or indeed the market) to invade the realm

of ethics. Such an invasion, like the domination of liability rules, would give

us a quantitative rendering of value that would fail to do justice to the richness

and variety of our ethical experience, all the while serving to inspire unneeded

hostility for economic analysis in general (Anderson, 1993).

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