Property Rights and Liability Rules: The Ex Ante View of the Cathedral

Abstract

Beginning with Calabresi's and Melamed's seminal article, economic analysis of property rights and liability rules has been largely done from an ex post perspective, taking as given the presence of the parties involved and their payoffs. This paper analyzes how such allocation of entitlements affects ex ante investments and actions. Even when ex post bargaining is easy, the ex post allocation of entitlements, by affecting the distribution of ex post value, can have significant efficiency effects ex ante. By identifying the ex ante effects of alternative rules, the analysis provides a framework for determining allocations of entitlement that would perform best from the perspective of ex ante efficiency.