The Yale Law Journal


Property Rules Without Borders

01 Sep 2006

A Response To

Of Property and Federalism Abraham Bell & Gideon Parchomovsky 17 Oct 2005

First, the good news: Bell and Parchomovsky (B&P) see federalism’s potential to foster benign competition in the production of legal rules. This vision takes federalism beyond the traditional view of states as laboratories for experiment. It looks to federal structures that create a market for legal rules—a market with minimal distortions and thus with good prospects for races to the top, with optimal rules coming to prevail.

An interstate market in rules exists already, as a firm or individual contemplating a move can assess states’ legal regimes and settle in the one best satisfying the mover’s preferences, i.e., offering the best trade-off (for the mover) between taxes and burdens on the one hand, and services and amenities on the other. Obviously, this market has something of a bundling problem. Firms and individuals contemplating a move can’t disaggregate the bundles of rules offered by each state; they can’t choose tort law from State A and property law from State B, much less refinements of either tort or property law. And states with great advantages supplied by nature itself—California leaps to mind—have such an edge that many settlers will find them attractive destinations despite inferior legal packages, if such states offer them. Thus, the market doesn’t give states as clear signals as would be ideal. But B&P’s focus on federalism as a market for rules is most welcome.

Now, then, the bad news: B&P’s proposals for enhancing competition in property rules seem unpromising. The basic idea is for individuals to be able to designate an item of property as governed by the rules of some state other than the one where the property is located. They would register the choice of law in both states. Evidently, a modest fee would redound to the benefit of the state supplying the law, thereby yielding an incentive to states to adopt popular rules. Recognizing that parties might select rules with adverse affects on others, B&P propose excluding “offensive uses.”

But the offensive-defensive distinction (putting aside its ambiguity) gravely understates the risks and rewards of the proposed system. Real property rules may be loosely divided into three groups: rules governing (1) transfers of property, as by deed, bequest or intestacy; (2) relations with what we may loosely call neighbors, such as nuisance law, the law of lateral and subjacent support, rights of overflight, and susceptibility to the police power and eminent domain; and (3) relations of parties with interests in the same piece of property, such as joint tenancies (with simultaneous undivided interests), and life estates and remainder interests (sequential interests). Application of the scheme to the first two seems to me very troublesome. As to the third, parties can achieve their goals without B&P’s reform, by contracting with each other, and thus will have little incentive to pay a registry fee for law from another state.

Though state laws governing property transfers vary a bit, and doubtless some are marginally more efficient than others, the key value is minimizing information and error costs—namely, the time needed for a title examiner to assess the validity of a current (apparent) holder’s title and the chances that the examiner will get it wrong. The introduction of alien rules, at the election of individual property owners, seems far more likely to increase these costs than to cut them.

For rules governing relations with neighbors, B&P’s own exclusion of “offensive” uses should cover the waterfront. As structured by B&P, any market in the rules would obviously be skewed, as owners engaged in rule selection would have incentives to select out-of-state rules to their personal advantage. If neighbors could select their rules (and why not?), the competitive chase for favorable rules would make renvoi look like a picnic. This doesn’t sound like a healthy market to me.

Finally, rules governing property owners inter sese (e.g., in a joint tenancy) are in almost all cases adjustable by contract. It would be a rare situation where parties creating such mixed ownership would find it more convenient to adopt a specific out-of-state law rather than simply to agree on their preferred contractual variations of local law.

Of course, some property rules mix the three categories. Real covenants and equitable servitudes, for example, often start in transfers dividing land among owners, with the transfer document creating rules to govern neighborly relations thereafter, subject to state limits. The limits often reflect concerns over excessive and hard-to-remove land use controls. The reasons against B&P’s solution for transfers and for neighborly relations seem both to apply to such hybrids.

In short, there seems to be no domain of property rules to which the B&P method of rule election would generate net advantages, and two (transfers and neighborly relations) where the results would be clearly adverse, perhaps catastrophic.

Apart from the competition among states to offer potential settlers bundles of attractive legal conditions, interstate rule competition may work best as a source of data. If states choose different regimes for relatively stationary activities (such as the practice of medicine), it may be possible to show differences in cost and outcomes that can help others decide which to emulate, just as intrastate airline deregulation produced data that helped assess federal rules.

But for activities potentially involving several states, such as sales of products, states’ work as laboratories is skewed because venue, personal-jurisdiction, and choice-of-law doctrines obscure the pertinent data. For example, under current law, a state contemplating a relatively constrained products liability regime has no reason to expect an offsetting benefit in consumer prices: Because injured parties will often be able to file suit in high-liability jurisdictions, sellers cannot adjust their prices in a particular state to reflect its rules. Perhaps B&P will next devote their considerable ingenuity to imagining venue, jurisdiction, and conflicts rules that would refine the states’ laboratory role.

Stephen F. Williams is a Senior Judge on the United States Court of Appeals for the D.C. Circuit. He is writing a book on the creation of property rights in Russia at the beginning of the 20th century, a study of the limits of liberal reform in an illiberal regime.

Preferred Citation: Stephen F. Williams, Property Rules Without Borders, Yale L.J. (The Pocket Part), Oct. 2005,