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Optimal Delegation and Decoupling in the Design of Liability Rules
Ian Ayres, Yale Law School
Paul Goldbart, University of Illinois at Urbana-Champaign, Department of Physics
ABSTRACT:
The central allocative decision confronting a judge in a nuisance dispute
should not concern the identity of the initial entitlement recipient but rather the
identity of the more efficient chooser—the litigant who can more efficiently allocate
the entitlement. We show that liability rules can produce four basic allocations
which differ centrally in the ways in which courts delegate to litigants the authority
to ultimately allocate the entitlement. Two classes concern "single chooser" rules
that vest (in the absence of an agreement to the contrary) the allocative decision
solely in one of the litigants. The other two classes concern a new type of rule, "dual
chooser" rules, that allow either party to veto the transfer of an entitlement. Dualchooser
rules are more than a theoretical curiosity both because they exist in our
current law and because at times they produce systematically greater allocative
efficiency than either type of single-chooser rule. Two heads are sometimes better
than one.
A central result of the paper is that in choosing among different liability rules
allocative concerns can be decoupled from distributive concerns. There exist an
infinite number of liability rules which produce each of the four basic allocations,
but every rule within a particular class divides differently between the litigants the
expected value of the allocation. To successfully decouple, courts should at times
impose "call option," "put option," "Pay or be Paid," and "Pay or Pay" rules.
SUGGESTED CITATION:
Ian Ayres and Paul Goldbart,
"Optimal Delegation and Decoupling in the Design of Liability Rules"
(March 9, 2001).
Yale Law School.
Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series.
Paper 249.
http://lsr.nellco.org/yale/lepp/papers/249
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