The first part of this paper will analyze the relative efficiency
of second- (and higher-) order liability rules. In a canonical asymmetric-information
model, we will show that second- (and higher) order liability rules dominate
first-order liability rules (i) when the taking regime is costlessly administered
and (ii) when bargaining is not possible. Part two relaxes this first assumption
by considering the relative efficiency of different rules when non-consensual
taking is not costless. And part three relaxes the second assumption by
considering the effects of bargaining on the rulesí relative efficiency.
See James E. Krier & Stewart J. Schwab, Property
Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U.L.
Rev. 440 (1995); Ian Ayres and Eric Talley, Solomonic Bargaining: Dividing
A Legal Entitlement To Facilitate Coasean Trade, 104 YALE LAW JOURNAL
1027 (1995) [hereinafter Ayres & Talley I]; Ian Ayres & Eric Talley, Distinguishing
Between Consensual and Nonconsensual Advantages of Liability Rules,
105 YALE LAW JOURNAL 235 (1995) [hereinafter Ayres & Talley II]; Louis Kaplow
and Steven Shavell, Property Rules Versus Liability Rules: An Economic
Analysis, 109 Harv. L. Rev. 713 (1996) [hereinafter Kaplow & Shavell
I]; Louis Kaplow and Steve Shavell, Do Liability Rules Facilitate Bargaining?
A Reply to Ayres and Talley, 105 Yale L. J. 221 (1995) [hereinafter
Kaplow & Shavell II]. The property/liability rule distinction originates
in Calabresi & Melamed, Property Rules, Liability Rules and Inalienability:
One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972). Madeline Morris,
The Structure of Entitlements, 78 Cornell L. Rev. 822 (1993). But
see Jules L. Coleman & Jody Kraus, Rethinking the Theory of Legal Rights,
95 Yale L. J. 1335 (1986) (arguing that degree of protection from non-consensual
taking can be thought of as change the content of the entitlement).
The option framework seem particularly well suited for some
nuisance contexts where the taking party intentionally takes the right of
anouther -- and hence seems to be consciously choosing, say, to pollute
or not pollute. By contrast, negligent tortfeasors do not intentionally
take the interest of other parties and might not seem to be affirmatively
exercising an option. However, even in the case of negligence, the tortfeasor
by choosing her level of care in a sense intentionally chooses a certain
probability of taking that comports with the option framework.
See also Krier and Schwab, supra note 1.
Louis Kaplow & Shavell I, supra note 1, at 721.
A fundamental problem of allocating liability rule options
for an entitlement is how to handle multiple parties wanting to exercise
an option. Ayres & Talley I, supra note 1, at 1088. Kaplow &Shavell, supra
note 1, at 733. As opposed to the "reciprocal takings" problems between
two parties, this "multiple takers" problem adds substantial complexity
to a liability rule regime because the regime would need to specify, inter
alia, the priority of option holders and whether the entitlement could be
non-concensually transferred among a series of takers. While we will argue
below that the possibility of reciprocal takings should not undermine the
potential usefulness of liability rule regimes, we do think that multiple-takers
problem can undermine their utility. In the nuisance context, the law might
be able to avoid or reduce the multiple-takers problem by only granting
liability rule options to oneís upwind neighbor (or neighbors). This would
created a different type of "mixed" regime, in that the entitlement would
be protected by a property rule with regard to all non-neighbors. Environmental
factors -- such as physical contiguity or the prevailing direction of wind
or water -- may also substantially reduce the number of potential takers.
Richard L. Revesz, Rehabilitating Interstate Competition: Rethinking the
"Race-to-the-Bottom" Rationale for Federal Environmental Regulation, 67
N.Y.U.L. Rev. 1210 (1992).
Kaplow & Shavell I, supra note 1, at 721.
Kaplow & Shavell I, supra note 1, at 719-720.
Under this schema, a property rule might be referred to
as a zero-order liability rule because it allows no non-consensual takings.
For example, infra Table 1, we will consider a third-order
liability rule in which the factory can exercise its first-order option
by paying $42, the laundry could then exercise the second-order option by
paying $58, and factory could then exercise the third-order option by paying
$75. Subsequent takings would by definition be deterred by property protection
-- meaning that if the factory exercised the third-order option and took
control of the entitlement, the laundry (and all others) would be deterred
from further non-consensual takings by arbitrarily high damages.
Formally, potential polluters would be deterred from polluting
before such court action by high fines for polluting without appropriate
agency or judicial permit. As before, property rule protection against certain
acts would be necessary to reenforce a reciprocal takings regime. Thus,
Kaplow and Shavellís canny observation that it is difficult to take back
pollution, once it is emitted does mean that the state could not create
a regime where polluters proposed polluting so as to allow pollutees to
exercise their take-back option. Indeed, even with regard to pollution,
the state could still provide a recipient with a take-back option with regard
to prospective pollution.
Vincent v. Lake Erie Trans. Co., 109 Minn. 456, 124 N.W. 221
Hanson refers to the Vincent standard as a "double-sided"
liability rule. Jon Hanson, Double- Sided Liability Rules in Tortious Necessity
Richard A. Epstein, A Common Lawyer Looks
at Constitutional Interpretation, 72 B.U.L. Rev. 699, 712
Kaplow & Shavell I, supra note 1, at 757 n. 143.
Vincent, 109 Minn. at 459; 124 N.W. at 222 (citations ommitted).
81 Vt. 471, 71 A. 188 (Vt. 1908).
Robert C. Ellickson, Alternatives to Zoning: Covenants,
Nuisance Rules, and Fines as Land Use Controls, 40 U. Chi. L. Rev. 681,
748 (1973). Ellickson described this proposal as a combination of what Calabresi
and Melamed called Rules two and four. Rule 2 gives the polluter an option
to pollute an pay damages, while rule 4 gives the pollutee an option to
enjoin pollution by damages to the polluter. Id. at 738. Calabresi & Melamed,
supra note 4, at 1115-23.
By way of contrast, the famous ruling in Spur Industries
v. Del E. Webb Development Co., 108 Ariz. 178, 494 P.2d 700 (1972), represents
a first-order liability rule in which the polluter has the originl entitlement
to pollute, but it is only protected by a liability rule so that the pollutee
has the option to stop pollution by paying damages.
But see Madeline Morris, The Structure of Entitlement, 78
Cornell L. Rev. 822, 891-93 (1993) (recognizing possible usefulness of second-order
liability rules, but not pursuing when these rules might be efficient).
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