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The Conventional Wisdom and Its Influential Critique The Conventional Wisdom and Its Influential Critique
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Challenging the Dominance of Opportunistic Behavior Challenging the Dominance of Opportunistic Behavior
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The Impact of the Endowment Effect on the Property-Rule/Liability-Rule Debate The Impact of the Endowment Effect on the Property-Rule/Liability-Rule Debate
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The Adequacy of Compensation under Liability Rules The Adequacy of Compensation under Liability Rules
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7 Property Rules versus Liability Rules
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Published:February 2020
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Abstract
This chapter discusses one of the most fundamental issues that every legal system must address: the form of protection that should be given to legal entitlements, including property rights. The chapter summarizes the debate regarding the choice between property rules and liability rules, and its underlying assumptions. It then shows how behavioral studies offer important considerations that should influence the legal discussion. Generally speaking, psychological studies invite more optimism about people's ability to reach mutual agreement under property rules and suggest that miscalculations of damages under liability rules may be a graver danger than presently realized. These studies caution us against increasing the use of liability rules and lend additional support to the use of property rules when transaction costs are low.
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