Conflict and property law: The hidden costs of takings and of liability rule protection

Abstract

This paper presents a novel argument for the law’s preference for property rules over liability rules based on their potential to reduce socially costly forms of retaliation by victims of takings. Property rules are more effective at mitigating conflict and discouraging costly retaliation by victims, thereby increasing social welfare. This hypothesis is tested empirically in a laboratory experiment involving a task that includes a valued possession that can be taken by others. Results reveal that both property and liability rules reduce retaliation, but property rules are more effective—particularly when the taking results in a net gain for the taker, who profits from the transgression. This suggests a hidden social cost in efficient takings under liability rules, providing evidence for the existing preference for property rules in legal systems. This paper contributes to the literature by revealing a significant, yet overlooked, advantage of property rules, rationalizing existing practice, and discussing the implications for the optimal choice of legal protection of entitlements.