Rethinking the Laws of Good Faith Purchase

Abstract

This Essay is a comparative economic analysis of the disparate doctrines governing the good faith purchase of stolen or misappropriated goods. We argue that prior treatments have misconceived the problem. An owner will take optimal precautions to prevent theft if she is faced with the loss of her goods; and a purchaser will make an optimal investigation into his seller's title iffaced with the loss of the goods. An owner and a buyer cannot both be faced with the full loss, however. This presents a problem of "double moral hazard" and it cannot be solved in a first-best efficient way. However, the laws of the major commercial nations are less efficient than they could be. This is particularly true of current U.S. law: In the United States, an owner always can recover stolen goods, which reduces her incentive to take optimal precautions. In turn, a buyer of those goods makes a suboptimal investigation into title because the owner may never find him. We propose that the owner should be permitted to recover goods only if she satisfies a negligence standard set at the socially optimal precaution level (which we argue isfeasible). This would increase her incentive to take precautions while retaining her efficient incentive to search for stolen goods. Since owner search and buyer investigation are complements, our proposal leaves unchanged the buyer's incentive to investigate. Also, under current law, an owner who voluntarily parts with her goods cannot recover them from a good faith purchaser. This rule reduces the owner's incentive to search and so reduces the buyer's incentive to investigate. Thus, we propose that a negligence standard should apply to owners generally. We argue that the verifiability objections to a vague standard of negligence can be satisfied by the specification of rulelike proxies for owner negligence. A comparative analysis of the law of good faith purchase in the leading commercial jurisdictions shows the chaotic nature of the current disparity in treatment of owners and buyers. Since today many stolen goods cross national borders, a generally applicable solution to the good faith purchase issue will further reduce the demand for stolen goods, reduce the incidence of strategic litigation, and enhance social welfare.