In particular, the proposition that property rules are socially preferable to liability rules when transaction costs are low appears to be either no longer. In recent years, new articles presenting rigorous analyses of bargaining incentives have overturned some of the fundamental claims made by Calabresi and Melamed in their seminal article on property rules and liability rules published in 1972. In contrast to conventional wisdom, this inefficiency persists even if a monopoly landowner controls all the land on which the parties may locate.

Allocating property rights to the first mover, as a 'coming to the nuisance' rule entails, leads to overinvestment. The first best can be obtained by allocating property rights (in particular the right to sue for damages) to the second mover. We investigate the relative efficiency of property rights regimes used in practice: injunctions, damages, the ruling in the Spur Industries case, etc. Given this departure from the setting of the Coase theorem, the allocation of property rights over the externality has real effects on social welfare. Contracts are inherently incomplete since the first mover cannot bargain over its ex ante investment decision with the anonymous second mover. We construct a model in which an investment opportunity arises for a first mover before it knows the identity of a second mover and in which joint location results in a negative externality.

Pdf plus nuisance