Bounded rationality and the theory of property

Oren Bar-Gill, Nicola Persico

Research output: Contribution to journalArticlepeer-review

Abstract

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 languageEnglish (US)
Pages (from-to)1019-1058
Number of pages40
JournalNotre Dame Law Review
Volume94
Issue number3
StatePublished - Jan 1 2019
Externally publishedYes

ASJC Scopus subject areas

  • Law

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