May 2008 Vol. 106 No. 7 THE REVIEW

Property Rules, Liability Rules, and Uncertainty about Property Rights

Stewart W. Sterk

Clarity can be a considerable virtue in property rights. But even when property rights are defined clearly in the abstract, ascertaining the scope of those rights in concrete situations often entails significant cost. In some instances, the cost of acquiring information about the scope of property rights will exceed the social value of that information. In those circumstances, further search for information about the scope of rights is inefficient; the social harm avoided by further search does not justify the costs of the search.

Potential resource users, however, make decisions based on private costs and benefits, not social costs and benefits. Legal rules can create incentives to search for information even when the search would be inefficient. In particular, “property rule” protection often gives leverage to right holders disproportionate to the harm those right holders would suffer from intrusion on their rights. That leverage, in turn, gives potential resource users private incentives to expend time and money on search even when search will generate minimal social benefit. “Liability rule” protection, by contrast, limits incentives to conduct inefficient search for the scope of property rights.

Property doctrine reflects this insight in a number of contexts. Thus, high search costs can explain the unwillingness of courts to award injunctive relief in cases of “innocent” boundary encroachments, as well as the Supreme Court’s recent limitations on the routine award of injunctive relief in patent and copyright cases.

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