This Article builds on the literature generated by Calabresi and Melamed’s framework for protecting entitlements through property and liability rules. Pointing to the gap between academic commentators’ conclusions that liability rules are superior in most circumstances and the reality that property rules overwhelmingly predominate in the law, Professor Smith offers a theory of the advantages of property rules that is based on information costs. The starting point for this theory is the observation that assets are heterogeneous in ways that are economically significant but costly to identify and value; liability rules inevitably involve some need for an official to make such valuations. Professor Smith argues that the preference for liability rules rests on certain convenient but overly simple assumptions that elide the costs of producing information about assets and activities.
Second, Professor Smith explores the natural pairing between property rules and owners’ rights to exclude others from their property. The “exclusion strategy” for protecting property rights relies on simple on/off signals such as the boundary around a parcel of land to communicate rights and duties to the rest of the world. Within this protected zone, owners have open-ended choices of how to invest in or consume the asset. This Article shows how pairing property rules with an exclusion strategy has advantages that stem from saving information costs, deterring opportunism by potential takers, and discouraging owners from engaging in wasteful self-help.
Finally, this Article shows how the information-cost theory illuminates the connection between property rule protection and traditional notions such as residual claimancy and property in the sense of an in rem right to a thing.