Academic journal article The Yale Law Journal

Distinguishing between Consensual and Nonconsensual Advantages of Liability Rules

Academic journal article The Yale Law Journal

Distinguishing between Consensual and Nonconsensual Advantages of Liability Rules

Article excerpt

Louis Kaplow and Steven Shavell's thoughtful reply to our recent article contains powerful insights about the relative efficiency of liability and property rules.(1) While we are in agreement that liability rules can be more efficient than property rules when transaction costs are low, we disagree about the cause of this liability-rule advantage. Kaplow and Shavell believe that liability rules hold only a nonconsensual advantage over property rules (i.e., liability rules tend to induce efficient nonconsensual takings). While granting this oft-recognized nonconsensual advantage, we contend that liability rules may also have a consensual advantage in low-transaction-cost settings (i.e., liability rules facilitate trade). We use this Comment as a forum to articulate our side of the story.

Our answer consists of two parts. In Part 1, we locate the current debate within the broader context of entitlement form, transaction costs, and bargaining. In Part II, we provide an example that distinguishes between the consensual and nonconsensual advantages of liability rules.


Before plunging into the technical arguments, it may first be helpful to contextualize our initial contribution and its relation to the debate between ourselves and Kaplow and Shavell. In Solomonic Bargaining, we ventured into what we termed "the economic purgatory between the findings of Coase and of Calabresi and Melamed."(2) This phrase bears elaboration.

Calabresi and Melamed argued persuasively that, when transaction costs make consensual transfer prohibitively expensive, liability rules are likely to ominate property rules because liability rules more closely replicate the outcome that transaction costs preclude.(3) When transacting is costless, Coase tells us that liability and property rules are equally efficient.'

In the last twenty-some years, numerous law-and-economics scholars have attempted to connect the dots between these efficiency benchmarks characterized by Coase, on the one hand, and Calabresi and Melamed, on the other. In this so-called "economic purgatory," transaction costs are positive but not prohibitive.(5) Richard Posner has characteristically offered a lucid and powerful theory by arguing that, in settings with "low" transaction costs, property rules are more efficient than liability rules because they channel transactions into the market.(6)

Solomonic Bargaining challenged this view in the context of a specific type of transaction cost: private information.(7) our core insight was that dividing an entitlement between two negotiators could cause more forthright and efficient bargaining.(8) Essentially, we argued that these so-called Solomonic divisions tend to obscure the titular boundary between "buyer" and "seller" during bargaining and, in so doing, dampen the parties' strategic incentives to "shade up" or "shade down" their privately known valuations. We argued that numerous entitlement divisions can cause this phenomenon, including divisions along use, space, and time dimensions; divided ownership through judicial randomness (i.e., "probabilistic" divisions); and divided ownership through untailored liability rules.(9)

It is with our extended analysis of this last form of division that Kaplow and Shavell find their sole quarrel. They agree with us that liability rules can be more efficient than property rules.(10) They part company with us, however, in interpreting the cause of this postbargaining advantage. Kaplow and Shavell argue that our analysis of liability rules failed to distinguish between the consensual and nonconsensual attributes of liability rules, and they conjecture that any advantage liability rules possess stems not from bargaining, but rather from the persistence of the Calabresi-Melamed "head start" that liability rules enjoy in the absence of bargaining.(11) More explicitly, they argue that liability rules have a nonconsensual advantage over property rules when trade is not possible, and that this nonconsensual advantage tends to persist once bargaining is allowed. …

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