Bar-Gill and Persico, ‘Bounded Rationality and the Theory of Property’

Strong, property rule protection – implemented via injunctions, criminal sanctions, and supercompensatory damages – is a defining aspect of property. What is the theoretical justification for property rule protection? The conventional answer has to do with the alleged shortcomings of the weaker liability rule alternative: it is widely held that liability rule protection – implemented via compensatory damages – would interfere with efficient exchange and jeopardize the market system. We show that these concerns are overstated and that exchange efficiency generally obtains in a liability rule regime – but only when the parties are perfectly rational. When the standard rationality assumption is replaced with a more realistic bounded rationality assumption, liability rules no longer support exchange efficiency. Bounded rationality thus emerges as a foundational element in the theory of property.

Oren Bar-Gill and Nicola Persico, Bounded Rationality and the Theory of Property, Notre Dame Law Review volume 94:3, 1019 (2019).

First posted 2019-02-22 06:47:33

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