The Liability Rule Continuum(s)

One conception of liability and property rules sees property rule protections as a continuum of punishments sufficient to deter potential takings, but sees liability protections as a specific quantum of damages sufficient to compensate an entitlement owner for a non-consensual taking or as the quantum that mimics the price of arms-length consensual trade. Chapter 6 explores the latter conception and quite expressly argues that policymakers should think of liability rules as having, like property rules, a continuum of potentially appropriate damages. For example, Guido tells us:

[I]t should not be surprising that the amount charged to permit entitlement changes might mirror neither the price that a market would set nor the penalty that a pure command structure would impose. In such instances, the assessment that both allows and limits entitlement shifts may be chosen to reflect that polity’s liking for, and devotion to, its ideologically mixed foundation.
I have, of course, used the terms “price,” “penalty,” and “assessment,” above, intentionally to indicate when the liability rule is being used, respectively, in place of a market, in place of a command, and for reasons having to do with its own ideological desirability. But I must confess that, in many instances, I cannot say which of the three is represented by the charge made under the liability rule.

Guido Calabresi, The Future of Law and Economics: Essays in Reform and Recollection 127-28 (2016).
Here I want to extend this Calabresian project of expanding the policy rationales that can support a continuum of liability rule damages.

First, the same continuum that separates a liability-rule “price” or “assessment” from a property-rule “penalty” might also exist with regard to inalienability protections. While the traditional conception of inalienable rules as being enforced with the threat of severe penalties, the Calabresian thrust suggests that policymakers might want to merely tax or impede certain kinds of alienation if the externalities or parentalistic concerns are not sufficient to warrant full-blown inalienability protection. For example, we might want to generally prohibit cars from driving in the breakdown lane of a highway, but make an exception for those with elevated need. Of course, the necessity doctrines provide one route to this result. But one can also imagine charging elevated amounts that deter casual usage but facilitate usage where the private benefit exceeds the external cost. Calabresi thus opens a space for both quasi-inalienable and quasi-property rules which produce intentionally intermediate deterrence and channeling effects. See also Ian Ayres, Regulating Opt Out: An Economic Theory of Altering Rules, 121 Yale L. J. 2032 (2012) (“When externality concerns or paternalistic concerns to protect the contractors themselves are insufficient to justify a full-blown mandatory rule, lawmakers might at times usefully impose “impeding” altering rules, which deter subsets of contractors from contracting for legally disfavored provisions. Impeding altering rules produce an intermediate category of “quasi-mandatory” or “sticky default” rules, which manage but do not eliminate externalities and paternalism concerns.”).

Second, the continuum of amounts charged can be more clearly seen if we better appreciate the “opportunity” charges that are often woven into our existing election of remedies or could be. Jon Hanson and Matt Stowe have shown that the venerable decision in Vincent v. Lake Erie, 124 N.W. 221 (Minn. 1910) is a vivid example where the common law election of remedies implicitly uses opportunity costs as incentives. Jon Hanson & Matt Stowe, Lecture Notes, Torts, Harvard Law School (Fall 1996). Vincent of course held a ship owner liable for damages when his ship damaged a dock during a storm. The decision is usually characterized as a traditional liability rule—in which a ship owner during a storm has the option (by exposing itself to a damage suit) to take the dock owner’s original entitlement to exclude mooring ships. But Vincent’s discussion of an earlier case makes clear that the ship owner’s liability option is itself only protected by a liability rule:

In Ploof v. Putnam, the Supreme Court of Vermont held that where, under stress of weather, a vessel was without permission moored to a private dock at an island in Lake Champlain owned by the defendant, the plaintiff was not guilty of trespass, and that the defendant was responsible in damages because his representative upon the island unmoored the vessel, permitting it to drift upon the shore, with resultant injuries to it. If, in that case, the vessel had been permitted to remain, and the dock had suffered an injury, we believe the shipowner would have been held liable for the injury done.

Vincent, 124 N.W. at 222. Vincent’s parsing of Ploof v. Putnam makes clear that the dock owner holds the initial entitlement; the ship owner (during the exigencies of a storm) has a first-stage option to take but in doing so makes itself liable for the injury done; and finally the dock owner has a second-stage option to unmoor the ship—which causes it to incur the opportunity cost of giving up its cause of action against the ship owner but also to expose itself to tort liability.
A different kind of opportunity cost arose in Producers Lumber & Supply Co. v. Olney Bldg. Co., 333 S.W.2d 619 (Tex. Civ. App. 1960) where the court discussed what should happen where a good-faith improver built a home on a vacant lot:

The landowner will first be permitted to pay the enhanced value and keep the land, but if he is unable or unwilling to do so, then the improver may be permitted to pay the value of the land before the improvements were placed thereon, and thus become the owner of the land and the improvements.

Id. at 624. The landowner in deciding whether to exercise its initial liability-rule option to “pay the enhanced value and keep the [improved] land” would rationally take into account that doing so would eliminate the possibility of being paid by the improver “the value of the land before the improvements.” The cost of foregoing prospective opportunities can also influence the total liability incentive effect. In filling out the liability rule continuum, judges and other policymakers can utilize a dizzying array of second-order liability rules that confront potential takers with pay or be paid choices, as in Olney, or even pay (a larger amount if you take) or pay (a smaller amount if you don’t take) choices. By manipulating the mixture of costs and opportunity costs, policymakers can maintain allocative efficiency while varying the expected payoffs of the parties to better accord with distributive notions of equity or to better promote ex ante investment decisions. See Ian Ayres, Optional Law: Real Options in the Structure of Legal Entitlements 89 (University of Chicago Press, 2005) (discussing this decoupling result).

President Barack Obama in his valedictory State of the Union said “for my final address to this chamber, I don’t want to just talk about next year. I want to focus on the next five years, the next 10 years, and beyond. I want to focus on our future.” But his speech quite appropriately used the successes of his administration as a spring board for motivating four big questions that he argued our country in the future will have to answer. Obama’s address in many ways parallels Guido’s book. While not his valedictory contribution, Guido leverages his reflections about the past to allow us all to better peer into the “future of law and economics.”

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