October 25, 2007
Westermann on Property Entitlements
W. Stephen Westermann has posted Strong Versus Standard Property Entitlements: Toward a New Theory of Legal Entitlements on SSRN. Here's the abstract:
Historically the property entitlement has been conceived as a unitary entitlement form that permits a holder to transfer the entitlement to a third party, and the third party to remove the entitlement from its holder, pursuant to a voluntary transaction. Thus, the background presumption—of legal theorists or the Supreme Court or contract law—has been that any entitlement structured as a property entitlement is subject to voluntary transfer in the same manner as any other, be it a fundamental Constitutional right or a parcel of land or a barrel of oil. This conception of a unitary property entitlement form is mistaken. Instead, there are two distinct primary classes of property entitlements: strong property entitlements and standard property entitlements. The basis for the distinction between strong and standard property entitlements is that the power of a third party to remove an entitlement from its holder via a voluntary transaction is comprised of two salient distinct powers. The first is the power to remove the entitlement by offering in exchange therefor money or a superior direct substitute for the entitlement, which power one might call "direct economic surplus inducement." The second is the power to remove the entitlement by making its transfer or waiver a prerequisite to delivery of economic surplus from some other source or sources, what might be called "indirect economic surplus inducement." A "standard property entitlement" permits a third party to exercise both direct and indirect economic surplus inducement in attempting to remove the entitlement; whereas a "strong property entitlement" permits a third party to utilize only direct economic surplus inducement in offers for the entitlement. Distinguishing between strong and standard property entitlements enables a more precise understanding of how rights protecting fundamental liberties, which are at minimum strong property entitlements, differ from most interests in land or chattels, which are standard property entitlements, as well as resolution of longstanding doctrinal confusion in areas such as U.S. constitutional law and contract law.
In addition to introducing the strong property entitlement as a new "type" or "class" of entitlement, this article sets forth a new logical organization of legal entitlements. This article asserts there are four salient types of entitlements that correspond to four salient gradations in power of a third party to remove the entitlement:
1. the liability-rule entitlement identified and named by Calabresi and Melamed—permits a third party to remove the entitlement without the consent of the holder but which requires such third party to compensate the holder in some manner;
2. the standard property entitlement—protects entitlement against removal by force, threat of force or fraud;
3. the strong property entitlement—protects entitlement against removal by force, threat of force, fraud or indirect economic surplus inducement; or
4. the inalienable entitlement—protects entitlement against removal by any means including direct economic surplus inducement.
The last three types of entitlements—the standard property entitlement, the strong property entitlement and the inalienable entitlement—may be thought of as comprising three salient classes of the property category of entitlements. Organizing property entitlements into salient classes based on third party removal power, each of which class contains a subset of specific property entitlement forms, permits precise conversations about the motivating conception of a particular property entitlement that are distinct from conversations, typified by those in the Cathedral article and its progeny, about what specific entitlement form is optimal taking into account market failure considerations such as third-party effects or collective action problems.
Finally, the article analyzes precisely the way in which an entitlement holder's autonomy with respect to an entitlement varies with the extent of removal power granted to third parties. The article posits that a holder's autonomy with respect to an entitlement is comprised of use autonomy and transfer autonomy, with possession autonomy constituting the foundational component of use autonomy common to all entitlements. The article shows that, putting aside possible effects from wealth endowment or cognitive limitations, increasing a third party's power to remove an entitlement from none (which corresponds to the inalienable entitlement) up to and including direct economic surplus inducement (which corresponds to the strong property entitlement) will increase the holder's transfer autonomy without diminishing the holder's possession autonomy. Increasing the third party's power to remove the entitlement beyond direct economic surplus inducement to include indirect economic surplus inducement (which corresponds to the standard property entitlement) will, though, reduce the holder's possession autonomy without increasing the holder's transfer autonomy. The strong property entitlement marks the critical inflection point beyond which any increase in third party removal power begins to mitigate the entitlement's possession autonomy by empowering a third party to remove the entitlement for a price less than the holder's value of enjoyment of those benefits through continued possession.
The fact that, putting aside issues of wealth endowment and cognitive limitations, holder autonomy is maximized by structuring the entitlement as a strong property entitlement does not imply that either social wealth or any particular holder's overall wealth is maximized at this level of third party removal power. It is possible that social wealth as well as the overall wealth of certain (or most) individual holders may be increased by structuring the entitlement as a standard property entitlement. When deciding whether to structure an entitlement as a strong or standard property entitlement, the issue for lawmakers is whether any gain in material wealth from increased allocative efficiency achievable by structuring the entitlement as a standard rather than strong property entitlement exceeds the cost of impairing the absolute possession autonomy that would be conveyed to each holder by structuring the entitlement as a strong property entitlement. For entitlements the primary purpose of which is to provide the holder with autonomy benefits enjoyable free from third party interference and for which any wealth creation through transfer is an incidental concern (such as, say, a right to be free from racial discrimination), it will usually be the case that such entitlements should be structured at minimum as strong property entitlements. On the other hand, for entitlements (such as a barrel of oil) for which allocative efficiency is the primary goal and where there is little, or no, concern about protecting a holder's subjective valuation, such entitlements should normally be structured as standard property entitlements.
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