учебный год 2023 / (Encyclopedia of Law and Economics 5) Boudewijn Bouckaert-Property Law and Economics -Edward Elgar Publishing (2010)

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policing and adjudicative institutions is analyzed. In this chapter, however, a problem is discussed which necessarily emerges also within already established property systems. Most often the problem of the emergence of a property system also involves aspects of public choice and constitutional economics. In this chapter these aspects are not systematically but only occasionally discussed. Occasionally, when public choice aspects provide us with some explanation of the choice of an original assignment rule.

The problem of initial acquisition should also be distinguished from the problem of adverse possession. In the former case, assets non-owned in the terms of the concerned legal systems (for example lands of the American West in terms of the US legal system, not necessarily in terms of Native American tribal systems), are involved. In the latter case, assets are concerned which are, though still owned, not in actual possession of the owner but of another person, that is, the adverse possessor. The problem of adverse possession regards both the relationship of the adverse possessor with third parties and the real owner (see Chapter 8 in this volume). In both cases, however, the problem of the definition of possession arises. In the first case because first possession constitutes often the legal base of initial acquisition. In the second case, in order to determine who is entitled to claim the protection, the possessor enjoys against third parties, and to determine the start of prescription periods.

2.First appropriation, auction or contracts?

The rule of first appropriation (‘first come, first served’; ‘finders keepers’) is firmly rooted in Western legal culture and social practice. Also in state of nature situations, such as the allocation of parking places on the street (Epstein, 2002) and seats in a restaurant, people spontaneously respect the position of the first occupant. Probably the possessive advantage, due to the fact that drive out-costs are on average higher than defence-costs, explains a lot of this spontaneous attitude.

Legal rules, endorsing first appropriation, are often considered as expressions of a democratic and egalitarian spirit. Everyone has an equal chance at the start, without regard to his class-status, race or religion. The American Homestead Act of 1862 is probably one of the most striking examples of this egalitarian philosophy (Allen, 1991; Lueck, 1995). The act allowed families to claim 160 acres of land, a surface considered as sufficient to feed a large farmer’s family. At the payment of around 10 dollars and the uninterrupted occupation of the claimed land during five years, the claimants obtained a valid title. The Act was applicable to the vast federal territories, west of the Mississippi-Missouri. About 250,000,000 acres were patented under the Act.

Under Roman law, first appropriation (occupatio) was possible for goods

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not belonging to anybody (quae antea nullius erant), such as wild animals, for goods taken from enemies (quae ex hostibus capiuntur), for abandoned goods (res derelictae) (see Gaius 2, 66; see D. 41,1,1,1–7; D. 41,7,1. Van Oven, 1948). For treasure trove (thesaurus) finders keepers applied when the treasure was found in the finders land. When another found the treasure half of the treasure accrued to the finder, half to the owner (see I, 2, 1, 39). Van Oven 1948; see also art. 716 Belgian and French C.C.).

The Common law upholds also a rule of first appropriation concerning non-owned things such as wild animals, as is illustrated by the famous case of Pierson v. Post (3 Cai. R., 175, N.Y. Supreme Court, 1805 – see further). First appropriation is also deeply rooted in liberal legal philosophy. According to John Locke first appropriation through mixing labour with the land constituted the only way of initial acquisition in the state of nature. As Western colonists considered Native Americans as still living under a state of nature, Lockean philosophy provided them with an argument to homestead freely land in America (Grunebaum, 1987; Tully, 1994). While the first appropriation rule is firmly rooted in our legal tradition and social practices, many economic studies criticize this solution as an inefficient rule (Anderson and Hill, 1990; Barzel, 1968; Libecap and Wiggins, 1984; Merrill, 1986).

Before discussing the economic merits or shortcomings of the first appropriation rule, we have to make an important distinction between the possession of a resource stock and the possession of resource flows (Lueck, 1995). In the first case the possessor, able to control the stock in a stable way has the prospect to future flows of this stock. In the second case, the possessor, unable to control the stock as such, is only able to capture flows once they are generated by the stock.

Examples of the two categories are:

Table 5.1 Stock–flow distinction

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The discussion about the efficiency of initial acquisition rules has another dimension in cases of stock possession than in cases allowing only flow capture. Consequently the case of stock possession is discussed first.

Several economic analyses point out that first appropriation rules concerning resource stock provoke a race among potential claimants, by which ownership is established too early. This may lead to a full dissipation of the rental stream of the asset. In order to show this source of inefficiency, a comparison is made with the situation in which only a single claimant is interested in establishing ownership of a stock resource. It is assumed also that the flow value grows over time, due to increases in the demand for the asset caused, for instance, by population growth (Lueck, 1995, 398).

Under these assumptions the optimal time tx to establish ownership for a single claimant is the point where the marginal return from waiting equals the marginal cost of waiting. The return from waiting consists of the returns of alternative activities, the single claimant can pursue by desisting temporarily from establishing stock possession. These returns are declining over time. The costs of waiting consist of the value of the stock flows missed during the waiting and as it was assumed that these flow values grow over time, marginal costs of waiting are increasing.

When a first appropriation rule opens an unconstrained competition among many potential claimants and these claimants are more or less homogeneous (more or less at an equal starting point in the race due to equality of physical strength, investments and information), rents will be entirely dissipated.

In case of a competitive rush between potential claimants to claim rights a claim is worth staking as long as the net value of the asset is positive. As a consequence the ownership will be established at tR, when the present value of the rental flow equals the present value of the entire costs of establishing ownership at tR. Rights are, compared with the single-claimant situation, established too early. The race equilibrium implies that the rental stream is fully dissipated. In addition, unconstrained competitive races involve also the costs of the not awarded claimants. Their efforts in the race are pointless ex post.

Homogeneity among potential claimants is, however, very unlikely. Several factors in the real world cause heterogeneity among claimants by which a full dissipation of rental streams of resource stock does not occur. Heterogeneity in this context does not refer to the variance of distribution of the costs of establishing ownership among potential claimants, but to the cost gaps between the lowest cost-contenders.

The distribution of costs in Figure 5.1b is at greater variance than in Figure 5.1a, yet heterogeneity, as understood in this context, is higher in the distribution of costs in Figure 5.1a because the differences between the

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Figure 5.1 Relevant cost-heterogeneity among race-contenders

lowest cost-contenders, the ones most likely to participate to the race, and the higher cost-contenders, are larger.

In the case of relevant heterogeneity the lowest cost-contender may enjoy such an advantage to the next best contender that his appropriative behaviour becomes similar to that of a single claimant, by which appropriation at an efficient time may occur. Heterogeneity of potential claimants can be the result of different factors such as unequal distribution of talents and information, an historical advantage in investment, or random factors. It can be diminished by investments, for instance a company investing in research capacity in order to fill the gap with a competitor who had started already his rush to a patentable invention. The other factors are, however, important enough to preserve in most cases a decisive margin of heterogeneity.

Beside natural factors such as uneven distribution of talents and random factors, heterogeneity can also be preserved by an institutional factor. Possession can be defined in such way that competitive races are excluded. The finders keepers rule, for instance, attaches crucial legal importance to the random fact of finding, so that competitive rushes become impossible.

As a consequence, one must conclude that a first appropriation rule does not lead necessarily to full dissipation of rents. When heterogeneity among potential claimants is guaranteed, dissipation will be avoided and property rights will be established on the efficient point in time.

Auction is the most prominent alternative for a first appropriation rule. This procedure presupposes a pre-appropriation by a third party, such as

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public authorities, pretending to have a general claim on assets, especially land, on the basis of legal prerogatives such as eminent domain, or the right to the spoils of conquest or discovery. These pre-appropriated assets are then submitted to an auction procedure, through which the asset is allotted to the highest bidder. By this procedure, it is argued, assets are on average allotted to the most efficient users. The users expecting the highest return of the asset will consequently bid away with the highest offers. This market mimicking procedure implies, however, also some costs. Lueck considers three cost-categories (Lueck, 1995, 403):

(1)Defining the auctioned assets: an auction requires a definition of the auctioned assets; such a definition requires costly information (search costs, prospecting, and valuation) about the assets in order to avoid the so-called winners’ curse. Bidders underestimating systematically the risks involved with the possession and exploitation of the asset, may win the auction. The bad bidders drive out the good bidders (Hansen and Thomas, 1999). Such costs can be prohibitively high, so that an auction procedure has to be written off for initial acquisition. An extreme example in this respect regards inventions. In order to auction them, the auctioneer has to invent them first, in order to define them. A first to invent policy, which allots the intellectual property to the inventor himself, is obviously much cheaper because it avoids the transaction costs between inventor and auctioneer, and auctioneer and bidders.

(2)Costs of the auction: auctions are costly, not only on the side of the auctioneer, but also on the side of potential bidders.

(3)Costs of protection of property rights: in order to auction, the auctioneer has to secure property rights on the auctioned assets.

According to Lueck a trade-off exists in the choice between the two main alternatives, that is, first appropriation or auction, between two categories of costs: the efficiency losses due to too early establishment of property rights in competitive races on one hand, and the different costs of auction procedures on the other hand. In particular two factors are decisive in this respect: the heterogeneity-homogeneity of potential claimants for the cost levels of first appropriation; and the possibilities to define and to evaluate ex ante the concerned assets for cost levels of auction (Lueck, 1995, 403).

Anderson and Hill perceive a third method of original assignment of property rights (Anderson and Hill, 2002). Races and auction are both the outcome of top-down procedures as they are exclusively driven by political processes. Anderson and Hill distinguish a bottom-up entrepreneurial alternative in which property rights are established by contracts.

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This is possible either by specific or by general contracting. In case of specific contracting, i.e. between individuals, groups or corporations, the property establishing contract involves two aspects: a) a contract of the original holder with a new holder transferring the asset; b) a contract of the original and new holder and with all involved third parties in which the latter promise to respect the property right of the new holder. By general contracting the second aspect is embedded in a general law binding all members of a polity.

The establishment of property rights through contracting is driven by entrepreneurs, perceiving opportunities in a rearrangement or redefinition of property rights, allowing them to capture Ricardian rents from the scarcity of resources which cannot be replicated. The property rights’ entrepreneur is alert to Ricardian rents, not perceived by others but derived from better-defined and better-enforced property rights.

The establishment of property rights on the Western frontier in the United States during the nineteenth century is the theatre par excellence of the contractual way. The customary range rights evolved from the simple priority principle and the claiming of land in an inexpensive way (e.g. by notification in newspapers) to refined systems of specific contracting. Cattlemen associations organized in the West a network of contracts aiming at preserving individual ownership on herds, affording protection of the herds, and controlling the grazing of the open range in order to avoid overcrowding. Roundup districts acted as exclusion systems towards interlopers. The system of specific contracts was gradually supplanted by the Washington-driven homestead laws. According to Anderson and Hill this law proved to be largely inefficient when applied to the big plains of the Midwest. The homesteading destroyed specific contracting networks, based on practical experience. The landholding units in the homestead laws were inappropriate because they were too small for more arid areas. This led to disasters such as the dust bowl in Oklahoma during the 1930s. Homesteading laws encouraged racing, thereby stimulating homogeneity of the participants. Settlements were premature and inappropriate investments were stimulated (Anderson and Hill, 2002). The belief in the sustainability of agriculture in arid zones on too small plots was stimulated by false folk wisdom such as the myth of ‘rain follows the plow’ or dry-farming-doctrine (Libecap and Hansen, 2001). The most dramatic episode of imposition of inefficient homesteading laws concerns the race on the Cherokee outlet, destroying an elaborated network of specific contracting, set up by the Cherokee Livestock Association (Anderson and Hill (2002), Lefebvre, 1992; Newsom, 1992). Anderson and Hill explain the inefficiency of the homestead laws by the lack of a residual claimant in the lawmaking process. This in contrast with the process of

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specific contracting, in which all involved parties were residual claimants (Anderson and Hill, 2002, 512).

3.Rules of capture

When the establishment of property rights on an entire stock is too costly, because exclusion costs are prohibitively high, property rights will only prevail on the flow of the stock (Lueck, 1995, 422). Sometimes property assignment is limited to flows of output because extraction is more easily measured than the stock itself (Libecap, 2006, 8). For instance, instead of establishing property rights on an entire oil well underground, property rights are only possible on pumped oil; instead of establishing property rights on herds of wild animals, property rights are only possible on captured and killed game; instead of establishing property rights on entire streams or rivers, property rights can only be established on water taken from them.

Capturing only flows creates risks of an open access dissipation (see also Chapter 4 in this volume). With an increasing number of users the marginal return to the effort of using declines. Due to the lack of any restriction, the number of users increases until the marginal return is equal to the marginal effort, which means that all rents from the flow of the resource are dissipated (Lueck, 1995, 403). Take, for instance, a river in an arid area, submitted to an open-access regime of capture. The evolution of returns is as follows:

Table 5.2

The optimal amount of users is 50 while under an open-access regime additional users will appear until the cost of effort is equal to the average return. Consequently, the number of users will increase up to the number of 90. At that number profits of water use are zero and rents are entirely dissipated.