Essay: A Transactional View of Property Rights

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MERGES R.P., Essay: A Transactional View of Property Rights, 10.03.2005

Type Article
Abstract Property rights and contract law are two of our most basic legal categories. Many legal scholars describe what makes them different; this Essay describes how they work together to promote economic exchange. Incorporating the insights of both "transaction cost" and "new property rights" economics, it identifies two crucial contributions that property rights make to real-world contracting: (1) precontractual liability, or protection for disclosure of sensitive information in the period leading up to contract formation; and (2) enforcement flexibility after a contract is executed, in the form of many subtle but important advantages that accrue to a contracting party who also holds a property right. This Essay argues that property's "transactional" role is growing in importance, as the "new economy" ushers in a more transaction-intensive industrial structure featuring greater numbers of smaller, more specialized firms.
Link - Xact View Prop Rts -102.19.05.pdf
Topics Property, Transparency


In the 1960s and 1970s, economists began to look more closely at property rights, trying particularly to answer the question: " Why do the contours of property rights change over time?" (p. 4). "The general idea that came from this approach was a progressive model of the development of property rights: when economic assets become more valuable, property rights are more tightly specified. [...] The increased costs of a private property regime - which entails marking and enforcing boundaries, among other things - became worthwhile only after the value of [assets] went up" (p. 4). "[P]roperty rights change dynamically with changes in the economy, typically expanding as the benefits of greater individual control come to outweigh higher specification and enforcement costs" (p. 5). However, with the emergence of IoT, we see a change in property rights' boundaries which is different under two perspectives: i. it is not due to an increased value of assets, but to technological change that enables control over the items commercialized even after their sale; ii. the contours change not because of a legislator's intervention or, anyway, an intervention of the public ordering system, but because of initiatives taken by privates. Even, the enforcement costs are not increasing with IoT, but decreasing, thanks to the remote monitoring and control abilities of the providers (see Creating Ubiquitous Computing, Virtual Worlds, and the Displacement of Property Rights). For what concerns the specification costs, on one hand - with the IoT - we have servitudes on personal property, which increases costs; but technical measures can help impeding non-authorized behaviours, even if also these measures have limits (see Personal Property Servitudes on the Internet of Things).

Contractual incompleteness = it means that "parties cannot specify all the possible outcomes in advance"; it can be overcome "by assigning a property right to one or the other of the transactors before contractual exchange takes place" (p. 8).

"[D]eep legal default rights [...] accompany property ownership" (p. 9). Do these default rights still exist today? It is true that maybe the traditional concept of property rights may be obsolete, but one thing is changing the specifications of property rights, another thing is to abandon any specification of property rights.

"[P]roperty rights act as contractual safeguards. They are uniquely valuable in solving some problems of contractual incompleteness" (p. 9). However, in the IoT world, i.e. where the service is necessary for the use of the thing owned, property rights are no more a contractual safeguard (Il Cloud Computing: alla Ricerca del Diritto Perduto nel Web even says - dealing with cloud computing - that property rights are replaced by credit rights, because there is need for the intermediation of the provider in order to use the resources purchased: in my opinion, the same happens in the IoT world, among whose most important enabling technologies there is - by the way - cloud computing; so, maybe the problem is not that property rights don't act as contractual safeguards, but that they doesn't exist anymore); or maybe, because of the fact that they should be a contractual safeguard, they should be shaped in order to include the service part of the IoT product (the default rights that accompany ownership should include the benefit of the essential service: it is true that here there is the problem of the "intermediation" of the provider in order to use the good owned, which seems in contrast with the traditional notion of property; but, at least when the essential service is ensured through competition - i.e. the customer of the good can choose among different providers of the service -, we may consider that the "use" of the thing - that shouldn't be intermediated in order to recognize ownership - is not the enjoyment of the thing enabled by, for example, a cloud computing service, but the ability of the customer to choose and obtain freely and in first person this service).

"Property rights are often characterized by their effect on "strangers": thus they are conventionally spoken of as being "good against the world"" (p. 20). They are opposed to the privity of the contract (see The End of Friction? Property Rights and Contract in the "Newtonian" World of On-Line Commerce).

Given the fact that property rights show their effects against the world, the fact that an IoT provider retains them on a product he commercializes increases the information/transaction costs in the second-hand market for all IoT products, even when the ownership on an IoT product object of a resale has been transferred from the provider to the first acquirer: in fact, first acquirers which want to resell an IoT item must always control that the good is their own property (see Personal Property Servitudes on the Internet of Things). Things are easier for second acquirers, because of the principle possesso in buona fede vale titolo: however, can we consider in good faith a person who could have fond in the Internet (in the legal items accessible from the product's website) that the property of that particular product is retained by the provider? Is in this case the argument of probatio diabolica which justifies the principle still applicable? On the other hand, however, given i. the myriad of different contracts and clauses that should be examined for a single object, and ii. the number of objects with which potentially we may interact everyday (see Personal Property Servitudes on the Internet of Things), their length, and the difficulty of interpretation, high transaction/information costs for second acquirers might exist anyway, and that might constitute an alternative supporting argument; in this way, the clarity (in form and content: see Digital Consumers and The Law. Towards a Cohesive European Framework) of the legal items may contribute to establish if the second acquirer was in good faith or not, and in this way the transparency itself would be incentivized. We must remember, however, that - even if the property is transferred to the first acquirer, or if the first sale doctrine/exhaustion participle allows the resale despite a different clause included in the contractual terms - the nemo dat quod non habet principle may anyway keep high the information costs for second acquirers, because they must understand if the limitations of use imposed by contract to the first acquirer are limitations to the object of transfer of ownership (and therefore apply also to them because of the nemo dat principle) or if they are only contractual limitations subjects to the privity of the contract; in this second case, they must also verify if the contract applies also to them because - given the fact that the use of IoT products usually requires access to the services (website, application, etc.) provided by the product provider - the contract says that simple access to the service means acceptance of the contractual terms.

"Gone is the large, vertically integrated firm that gathered all the resources - physical, intellectual, and human - needed to produce a given item." Wee have "new, modular firms"; ""dis-integrated" firms have replaced intrafirm coordination with firm-to-firm coordination. [...T]hey replace centralized hierarchies with decentralized "markets"" (pp. 42-43). "The new economy is simply much more transaction-intensive that the old one" (p. 46). See the business models highlighted in Overview of the Internet of Things — Recommendation.