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.
|Original language||English (US)|
|Number of pages||40|
|Journal||Notre Dame Law Review|
|State||Published - 2019|
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