Rethinking the Theory of Legal Rights

Jules S. Coleman
Jody Kraus, Columbia Law School


In the economic approach to law, legal rights are designed, in part, to overcome the conditions under which markets fail. In correcting for market failure, economic analysis endorses two rules for assigning legal rights. The first specifies the allocation of rights under conditions of rational cooperation, full information and zero transaction costs. Provided that exchange is available and that obstacles to exercising it are insignificant, rational cooperators will negotiate around inefficiencies. Under these conditions, legal rights are not assigned in order to establish optimal levels of resource deployment directly; rather, they establish well-defined entitlements or negotiation points which create a framework in which mutually advantageous bargains leading to optimal outcomes can be realized. This role of legal rights in securing optimal outcomes is suggested by the Coase Theorem.' The second rule for assigning legal rights specifies the procedures to be followed in the event the conditions of full information, rational cooperation and zero transaction costs are inadequately satisfied. Where impediments to successful negotiations are substantial, inefficiencies in the initial allocation may not be overcome through mutually advantageous exchange. Unable to rely upon the exchange process to overcome inefficiencies, a court must allocate entitlements efficiently from the outset. In doing so, the court continues to rely upon the exchange process, though in a different manner. Instead of relying upon exchange to rectify inefficiencies, including inefficient judicial decisions, the court relies upon the market paradigm to help it identify the efficient outcome it seeks to replicate. Let's refer to an exchange market in which the conditions of the Coase Theorem are met or approximated as a "Coasean" market. When a court cannot avail itself of the Coasean market, it is left to imagine what the parties would have agreed to in a hypothetical-Coasean market. In this market, the right to use a resource would have been secured ultimately by that party who would have paid the most for it. The court then mimics the outcome of the idealized, but unrealized Coasean market by "auctioning" entitlements to those who value them most-as judged by each litigant's willingness to pay.