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

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Rose-Ackerman, Susan (1985), ‘Inalienability and the Theory of Property Rights’, 85 Columbia Law Review, 931–969. Reprinted in Epstein, R. (ed.) (2007), Economics of Property Law, Cheltenham, Edward Elgar Publishing, 421–459.

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Decomposition of property rights 127

Once owners have the right to divide and transfer their interests, rights in land can be divided in at least four ways. First, and most obvious, land rights are divided spatially. In addition to the ordinary horizontal division of land by region, the common law allows vertical division into condominiums, useful for modern residential living, as well as surface estates and subsurface estates useful to mining firms. Although there are economic studies of the optimal size of landholdings for uses such as farming, the law and economics literature on spatial division of rights in land is not extensive. Perhaps this is because there is not much law to study. One major exception to this generalization is the substantial literature on takings law, within which one topic is whether geographic areas can be segmented by landowners hoping to establish an unconstitutional taking of a small part where the remaining portion has not been affected.

Second, land rights can be divided temporally. Indeed, under early English common law, a feudal tenant’s land rights lasted no longer than he did. An obvious inefficiency of that system was that any lasting improvement made by the tenant to the land would redound to the benefit of the overlord. Perhaps in part to internalize these positive temporal externalities, the law soon allowed a tenant to acquire rights that would survive his death. This was accomplished by use of the ancient words ‘and his heirs,’ a phrase still found today. The literature on subdividing rights by time, including the substantial literature on landlord-tenant law, is discussed after alienation and tenurial systems.

Third, rights in land can be divided according to use. One person can enjoy nearly complete dominion over a piece of land while another person holds a right to put the land to some limited use, such as burying utility lines, harvesting timber, or driving across it to get to a landlocked parcel. The multiple and confusing common-law doctrines of covenants, equitable servitudes, easements and profits govern this area of law, along with more modern zoning rules imposed by legislative bodies. The commonlaw doctrines controlling private division of land by uses are discussed, jointly and severally, after temporal divisions.

Fourth, in the common law system, rights in land or any other asset can be divided by creating a trust. A trust divides ownership into rights to control, held by the trustee, and rights to enjoy, held by the beneficiaries. The trust is enjoying a resurgence of interest, in both financial and academic markets.

It is not hard to see the advantages of decomposing rights along some of these dimensions. An owner might have little use of some of his rights, and might find someone to whom they are worth more. The disadvantages of decomposition are sometimes harder to anticipate. Any subdivision raises possibilities of disputes along the line of division and, if that line

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is inadequately specified or monitored by the parties or their successors, externalities may flow from one subpart to another (Shavell 2004, p. 29). Another cost of dividing rights relates to the difficulty of reassembling them in the future when consolidated rights are more efficient.

A.‘Takings’ doctrine

Decomposition of property rights has become an issue of constitutional importance in the United States. The Fifth Amendment prohibits the government from taking property without paying just compensation. One difficult issue is when to consider ‘property’ to have been ‘taken’. If the government deprives an owner of all her rights in all her land, it has plainly taken property. It is also clear that the government cannot avoid a finding that it took property by decomposing the rights spatially or temporally and taking only a portion. If the government occupies half of the owner’s land for ten years, that is just as surely a taking as a deprivation of all land forever. But the outcome of a takings claim becomes less predictable if the government decomposes the owner’s rights along the dimension of use, prohibiting some uses and allowing others. Since the US Supreme Court’s formula for resolving takings claims turns in part on the proportional degree of financial deprivation, aggrieved owners claiming compensation would like to decompose their rights, separating restricted uses from unrestricted uses in order to increase the percentage taken. Although owners have had little luck doing so, the US Supreme Court has said recently, in Palazzolo v. Rhode Island (2001), that the issue remains open.

In addition to percentage diminution, the US Supreme Court considers whether the regulation deprives the owner of distinct, investment-backed expectations. Thus the Court has decomposed uses according to how much the owner has invested in them. This uneconomic portion of takings doctrine has been defended by reference to the findings of experimental economics and psychology (Stake 1995). Depriving persons of longstanding uses carries especially high psychological costs, higher than would be recognized if the value of the loss were calculated by reference to the amount the owners would be willing to pay to acquire the rights taken. However, recent experiments by Zeiler and Plott (2005) have cast doubt on earlier conclusions.

B.Over-fractionalization

In addition to the specific doctrines discussed below, decomposition of property raises over-fractionalization issues that have recently received a good deal of attention. Productivity suffers when property is divided among too many owners (Dagan and Heller 2001). For example, land on Manhattan Island was cut up geographically into parcels that were

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presumably efficient for development in the nineteenth century. Larger parcels would be optimal today, but consolidating them is impeded by holdouts. One special case of over-divided rights is the anticommons, in which a number of people hold a right to exclude (Michelman 1982; Ellickson 1993; Heller 1998).

Fragmentation of intellectual property may prevent efficient use of knowledge (Heller and Eisenberg 1998) just as fragmentation of real estate may prevent efficient development of land. In both cases, holdouts may prevent assembly of the different rights into a package of the size most efficient for development in today’s market. Depoorter and Parisi (2003) noted that if transaction costs are asymmetrical and dividing fragmented interests is easier than reconsolidating them, there will be a trend towards an ever increasing level of fractionalization in property. The numerus clausus principle has been heralded as a rule that helps limit decomposition to the efficient level (Heller 1999; Merrill and Smith 2000). There is an optimal standardization of rights that is determined by the trade off between utility of having more forms and the confusion they would engender (Merrill and Smith 2000). Hansmann and Kraakman (2002) argued that the law does not limit the forms of property so much as it regulates the types and degree of notice required to establish different sorts of property. These limitations aid verification of the ownership of rights offered for conveyance.

As technology has advanced, new land uses have created externalities more remote than those of land uses in the past. For example, chlorofluorocarbons, CFCs, degrade the ozone in the atmosphere, allowing greater penetration of ultraviolet radiation and increasing the risk of skin cancer in people far from the location at which the CFCs were released. Scientific advances have also increased our ability to detect remote effects of activities that were long thought to have only regional externalities. For example, the emission of carbon dioxide contributes to global climate change in ways that were not understood in the past and are not fully appreciated even at the present time. New technologies may create both commons and anticommons tragedies that are not easily solved using traditional rules of property law (Rose 1998 and 2002). New forms of property or decompositions of rights might, or might not, be useful in preventing the tragedies. Although the topic of governing a commons is closely related, its vast literature (e.g., Ostrom 1990) is outside the scope of this chapter.

2.Limited alienation of property – land tenure systems

The topic of land tenure systems sits between the general theory of property and the private subdivision of property rights. The question is what

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happens when private owners are not allowed to have full rights in land. A right sometimes missing from the property bundle is the right to alienate other rights.

By the Statute Quia Emptores in 1290, English landholders gained the right to transfer their interests to others without obtaining consent of the overlord, who in important ways played the role of the modern state. Prior to that time in England, and more recently in other places, landholders lacked complete freedom of alienation. From the date of statehood, all of the United States have allowed landowners to transfer their rights to others. So well ingrained is this right that it seems odd that it could be otherwise.

Despite a long heritage of free alienation, the United States government has not extended that right to many American Indians holding Reservation lands. As a result of various statutes and changes in policy, Indian Reservation lands are held in three types of tenure. Some Reservation lands are held in legal fee simple by individuals, both Native American and not, and are completely alienable. Some lands are held by Native American tribes, but legal title lies in the United States, so the tribes cannot alienate the lands. Similarly, some lands are held by individual Native Americans, with legal title resting in the United States, again with the result that the lands are inalienable.

Economic theory would predict that where rights cannot be transferred, productivity will suffer. Johnson (1972), applying the analysis of Coase (1960), Alchian (1963) and Demsetz (1964 and 1966) to land tenure, argued that restrictions on the sale of land reduce investment in land by making it difficult to borrow for improvements and by limiting an owner’s ways of capturing his investment. He concluded that there must be freedom and legal enforcement of sale and rental contracts for a system of land tenure to facilitate wealth increases.

Rose-Ackerman (1985) argued that economic theory places too much confidence in private markets, and that restraints on alienation can efficiently exist as market corrections to externalities. Traditional economic remedies for externalities may be insufficient in the presence of high transaction costs. She concluded that in specific, enumerated instances restraints on alienation can advance efficiency.

The three types of land tenure existing on Indian Reservations presented Anderson and Lueck (1992) with an opportunity to study empirically the effects of tenure on land productivity. Where Native Americans cannot offer the land as security for a loan, costs of borrowing will be higher and capital investment will be lower. Where they cannot sell their interests, it becomes harder for an owner to gather parcels into a farm of optimum size. Difficulties in transfer during life increase the frequency of death-time

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transfers and thus the frequency of devolution by intestate succession which often divides ownership. Multiple ownership leads to decreased investment of labor by owners because the benefits of the effort will fall in part on other owners. Multiple ownership, which entails sharing of inputs and output, may also cause owners to avoid the most valuable use if the inputs to or outputs from such use are comparatively harder for multiple parties to monitor.

Anderson and Lueck found that per acre value of agricultural output is 85–90 percent lower on tribal-trust land than on fee-simple land and 30–40 percent lower on individual-trust land than on fee-simple land. Their study did not, however, eliminate the possibility that the lands held in individual or tribal trust were simply less productive lands than the average lands held in fee. They stated that the patterns of ownership appear random on the map, but untillable mountain peaks might also appear random on a map. They also argued that the determinants of value are probably different today than when the parcels were allotted, but that seems dubious for land in agricultural use today. The authors published data from the US Department of Agriculture relating to relative land quality. On average, trust land has a lower percentage of land in the top four land-capability categories, but the authors say that the difference is not sufficiently strong to reject the hypothesis that the land is equivalent. (Given the small number of observations on quality, N = 13, it would have taken a large difference in quality to reject the null hypothesis.) That the difference in rated capability is not strong enough to be significant does not mean that the difference might not indeed influence the actual land productivity. In addition, considering the obvious potential relationship between land quality and productivity, it is unfortunate that there were quality classification data for only 13 reservations.

Congress attempted to reduce the problems associated with divided ownership of American Indian lands by reducing the number of owners. The statute provided that, at the death of the owner, small fractional interests in individual trust lands would pass to the tribe instead of the intestate successors or devisees. This attempt to improve the productivity of Indian lands was struck down by the US Supreme Court (Hodel v. Irving, 1987), which held that depriving fractional interest holders of their ability to pass those interests at their death takes property without just compensation. Thus Congress’s long history of failure in dealing with Indian lands continues.

Comparing the history of Congressional control of Indian ownership to English history shows the economic importance of a good fit between law and culture. In common-law England, when a landowner died his lands passed according to the rules of primogeniture, under which the eldest

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male child took full title. Primogeniture avoided fractional interests that could lead to ineffective use. By the time modern rules of intestate succession were adopted, hundreds of years of experience had created an English cultural expectation of individual ownership. The English tradition of individual ownership counteracted the tendency of the modern intestacy law to subdivide ownership; private transfers kept most lands from being shared by too many hands. The Native Americans, upon whom the US Government forced individual ownership and fractious laws of intestate succession, had a different cultural heritage, one of tribal ownership or no ownership at all. Native American culture, being less oriented toward individual control, did not counter the sterilizing tendency of the modern rules of heirship.

This relationship between culture and law is important for understanding third-world development. Demsetz (1967) contended that as resource values rise, individual property rights emerge to encourage more investment and better husbandry. However, Fitzpatrick (2006) argued that many developing regions still have open access and uncertain rights regimes because enforcement is unreliable. Other scholars have questioned whether Western individualized marketable property rights are optimal for development. Dixon (2007) argued for legitimation of tribal custom as a solution to the failure of governmental land mobilization. Banner (1999) argued that Maori use rights would not necessarily be inefficient, as use rights do not face the same collective action problems as open access. Although a commons can lead to overuse, the tragedy is not ineluctable as social norms and other informal regulations can constrain behavior (Fennell 2004). Serious problems arise when a government displaces social norms with a legal property regime that cannot be relied upon, effectively removing what rights there were (Fitzpatrick 2006).

The problem of alienability arises in a different way in connection with long-term leases. Historically, common-law courts have allowed landlords to impose restrictions on the alienability of leaseholds. By inserting the necessary terms in a lease, landlords could retain to themselves the legal power to prevent alienation without their consent. Courts upheld these clauses without concern for whether the landlord withheld consent unreasonably or arbitrarily. Recently, it has appeared to observers that some American courts will no longer let landlords prevent alienation by tenants. However, it is also possible to read some of the decisions as merely requiring landlords to express clearly their retention of an absolute veto, a requirement which would reduce tenants’ information costs.

Johnson (1988) argues that restrictions on alienability serve legitimate purposes and, hence, the modern trend toward limiting the scope of restrictions will lead to inefficiency in the law. Landlords need to be able

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to keep tenants from leasing to new tenants whose occupancy might injure the value of the landlord’s reversion. Because they cannot easily specify in advance all of the ways in which potential new tenants might injure their retained interest, landlords often need wide discretion to reject the transfer of the leasehold. Without that power, landlords will forsake the long-term lease in favor of otherwise less-efficient alternatives such as short-term leases. In addition, Johnson argues that requiring landlords to be more clear in their retention of unfettered discretion to veto transfers may be quite costly. He does not spell out in practical terms, however, why it would be ineffective or especially costly for landlords wanting to retain an unconstrained veto to do so by reserving ‘sole, absolute, and unfettered discretion’ in their leases.

3.Temporal division via the estate system

The English common-law system allows a number of different ‘estates’ in land, each estate varying in potential duration. A ‘fee simple’ lasts potentially forever. A ‘life estate’ lasts for the life of a person, usually the holder of the estate. A ‘term of years’ is measured by a period of time. All of these estates can be made ‘defeasible’, by attaching a condition specifying the circumstances in which the estate terminates prematurely. For example, a transfer ‘to the City as long as the land is used for a public park’ creates a fee simple determinable, an estate that could last forever but will terminate earlier if the land is not used for a public park. With the exception of the fee simple absolute, in which the owner holds perpetual rights, each of the estates above divides rights according to time or contingency or both, with the holder of the named estate holding the present possessory rights and at least one other person holding a ‘future interest’ which will become possessory when the present estate terminates.

It is plain that dividing rights temporally or contingently may increase the utility of land. A student may need a place to live for only a year and have no desire (or capital) to invest in ownership that lasts forever. A teacher taking sabbatical leave may have no interest in possession for that year, but a strong interest in the right to possession forever thereafter. A one-year lease with an early termination for non-payment of rent divides the risks and benefits associated with ownership of the land to accommodate both interests and maximize the value of the land.

Stake (1990) argued that some forms of divided ownership, those hinging on contingencies that might occur in the distant future, diminish rather than increase the utility of land to living persons. The empirical evidence for this proposition is that those temporal divisions of rights are made primarily in gifts (often testamentary gifts). Because such divisions are rarely, if ever, found in transactions in which two or more parties

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exchange rights to produce gains from trade, there is good reason to doubt that creating such interests increases value. Of course the act of dividing the ownership makes the donor happy, and that utility added to the values of the present and future interests will probably be greater than the value of a fee simple absolute. But after the donor dies, which is sometimes the instant the two interests are created, the donor’s utility drops out of the sum and the remaining values are together less than the value of a fee simple. One economic function of the Rule against Perpetuities, which eliminates remote future interests, is to help reunite multiple interests into a more valuable fee simple.

Many courts and commentators have pointed out that the Rule against Perpetuities is often difficult to apply and the complexity of the Rule has led to various proposals for ‘reform.’ Hirsch and Wang (1992) argued that the Rule should be applied differently depending on the ways in which the dead hand attempts to control the land. The most popular reform is the wait-and-see approach, which saves interests that vest in a timely manner. Another popular ‘reform’ has been to eliminate whole categories of interests from the ambit of the Rule. At this point in time, it appears that the Rule against Perpetuities will itself be void within lives in being plus 21 years.

The possibility of negative externalities is created whenever land rights are divided according to time. A life tenant might fail to make repairs to existing buildings because the repair costs will fall solely on the tenant but the costs of not repairing will fall in part on the ‘remainderman’ holding the future interest. To the dismay of his landlord, a tenant with a one-year tenancy might cut down valuable trees to use for firewood despite the trees being worth more, in the long run, alive. The common law partially internalized negative temporal externalities by the doctrine of ‘waste,’ which makes the present estate holder liable to the holder of the future interest for actions that damage the land in a permanent way. Interestingly, the doctrine of waste also acknowledges the subjective value of land in its rule that merely changing the character of land can be waste even though the change increases market value. Posner (2007, p. 74) pointed out that present and future estate holders could in theory prevent inefficient maintenance by agreement, obviating the need for the doctrine of waste, but negotiations may bog down in bilateral monopoly problems. Furthermore, the future interest holders are often minors or unborns who lack the capacity to contract.

The converse of the waste problem is created by positive externalities. The present estate holder and future interest holder may both fail to make efficient improvements to the land because each bears the burden of the improvement while some of the benefits accrue to the other. With a nod