III. Property
A. The economics of property rights
2. Costs of property rights (cont'd.)

    (4) Rent seeking

    Ex: Homestead Act of 1862
    160 acres
    $1.25 per acre
    "for the purpose of actual settlement and cultivation, and not, either directly or indirectly, for the use or benefit of any other person or persons whomsoever."
    file affadavit
    be head of family or 21 years plus
    Reside for 6 months and make "suitable" improvements. (CU146) "such as successfully growing fruit trees" (F121)

    Results:
    early farming, at a loss, to claim future profits. "It follows that the effect of the Homestead Act was to wipe out, in costs of premature farming, a large part of the land value of the United States." (since some are better at homesteading, not all of the value dissipated.) (F121)
    Dollhouses (CU146)
    So why didn't government auction off the land? It tried, but squatters scared off bidders and got land at minimum bid. (F121)
    Terry Anderson and P.J. Hill, "Privatizing the Commons: An Improvement?" Southern Economic Journal, Vol. 50, No. 2 (October 1983),pp. 438-450. (F122n)
    History of Public Land Law Development by Paul Gates, with a chapter by Robert W. Swenson, Washington D.C., USGPO 1968. (F122n)

    Defense externality: From US perspective, homesteading did defend boundaries and secure land for the US, but at expense of other settlers, such as native Americans.
    Douglas W. Allen, "Homesteading and Property Rights: Or 'How the West Was Really Won'," JLE 34:1-24. (1991). (F122n)

3. Equilibrium property arrangements

    "Demsetz theorized that property arrangements in all societies evolve efficiently in response to change in technology, demand, and other economic conditions." (LEA179) 
    Demsetz, Harold. "Toward a theory of property rights." AER 57 (1967): 347. (LEA179n)

    Property rights systems emerge when "the costs of operating [a legal] system of property rights are less than the sum of all individual costs of private defense." (CU82)

    Sequential example:
    Hunting: do not privatize the land, "hunting is better with the quarry privatized" (to first spotter). (LEA116) Bailey, Martin "The Approximate Optimality of Aboriginal Property Rights," XXXV JLE 183 (1992).
    Grazing: Fencing is easier on large tracts, helping to explain communal grazing. (LEA182)
    Farming: "Risk analysis...suggests why the pioneers would begin to parcelize their lands after a period of time.... [A]fter a few years, the risk-spreading benefits of group land ownership would no longer outweigh its familiar shortcomings, such as the shirking that notably affected Jamestown and Plymouth." (LEA183)

    Technology is key:
    Ex: barbed wire

Property rights game plan:
    B. Acquiring property rights
    C. Exercising property rights
    D. Conflicting property rights
    E. Intellectual property rights

B. Acquiring property rights

    2 key questions for courts: 
    (Q1) who values rights most highly? (F112-3)
    98: Normative Hobbes Theorem: "[T]he law should allocate property rights to the party who values them the most." (CU 98)

    (Q2) if uncertain, then what assignment allows lowest-cost adjustment? (F112-3)
    97: "Normative Coase Theorem: Structure the law so as to remove the impediments to private agreements." (CU 97)

    Common practices:
    (1) "bright line rules"
    "simple and clear property rights." (CU97)
    Ex: "first in time, first in right." (CU97)

    (2) stare decisis --> "courts avoid the information costs of determining who values a right the most." (CU 98)
    Compare: private transaction costs vs. court information costs
    TC < IC => follow precedent
    TC > IC => award right to highest valuer (CU 99)

    (3) public recording of property claims 
    "makes determining ownership easier." (CU 97)

1. Initial assignment

        Ex1: gold

2 legal rules:     Rule 1: first possession (CU 76)         you dig it out of the ground, you own it     "Possession is nine-tenths of the law"     Rule 2: tied ownership         you own the land, you own what's under it     If you remove it and don't sell it, it gets stolen

    Which is more efficient?
    Tied ownership advantage: avoids preemptive investments (and similar rent-seeking costs)

    Ex2: oil
    First possession advantage: cheaper to administer (lower cost of verifying rights)

    Cases:
    Haslam v. Lockwood 37 Conn. 500 (1871) -- first possession; illustrates claim of ownership (P84)

1. What are the facts of the case?
2. What did the appeals court decide?
3. What, if any, economic arguments did the court rely on?
4. In what way, if at all, does the court decision promote social welfare?
5. Do you agree with the court decision?
6. What if Lockwood had waited another day or so?
7. What costs did Haslem incur to take possession?
8. What costs did Lockwood incur to take possession?
9. Could Haslem have taken any reasonable extra efforts to stake his claim and reduce the costs imposed on Lockwood?
10. How could a court decision have helped promote more efficient behavior by property claimants like Haslem?

Key point: Assign rights to encourage behavior that promotes social welfare.