Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules

Abstract

Louis Kaplow and Steven Shavell's thoughtful reply to our recent article contains powerful insights about the relative efficiency of liability and property rules. While we are in agreement that liability rules can be more efficient than property rules when transaction costs are low, we disagree about the cause of this liability-rule advantage. Kaplow and Shaveli believe that liability rules hold only a nonconsensual advantage over property rules (i.e., liability rules tend to induce efficient nonconsensual takings). While granting this oft-recognized nonconsensual advantage, we contend that liability rules may also have a consensual advantage in low-transaction-cost settings (i.e., liability rules facilitate trade). We use this Comment as a forum to articulate our side of the story. Our answer consists of two parts. In Part I, we locate the current debate within the broader context of entitlement form, transaction costs, and bargaining. In Part II, we provide an example that distinguishes between the consensual and nonconsensual advantages of liability rules.