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The Case for Imperfect Enforcement of Property Rights

There is nothing so uncontestable as the incentive of an owner to safeguard her belongings. Yet property law contains various rules and doctrines that force owners to adopt measures to protect their assets. For instance, a number of regulations and administrative procedures require owners of gas stations to use “prepay pumps” to eliminate the threat of customers pumping gas and then fleeing before paying. Pre-1976 copyright law provides another example: historically, authors of copyrightable works lost ownership rights if they published the works without affixing proper notice to all copies of the work, and thereby notifying potential users of the copyright claim. The law of trade secrets supplies a third example: the Economic Espionage Act explicitly requires “reasonable measures to keep . . . information secret” as a condition of enjoying legal protection for the information as a trade secret.

These and similar state-imposed demands on property owners seem puzzling and counterintuitive. After all, property owners have their own incentives to voluntarily adopt measures to secure their entitlements in their belongings. So why do lawmakers deem it necessary to enact rules to induce behavior that would happen in any event?

In this Article, we argue that one solution to the puzzle lies in an important and underappreciated countereffect emanating from state enforcement of property rights. The accepted lore among property theorists is that state enforcement of private property rights is both desirable and efficient due to economies of scale and scope that can be realized via this centralized enforcement. Going against the conventional wisdom, we argue in this Article that state enforcement also has a downside: it may give rise to a moral hazard problem that distorts owners’ investment incentives, causing them to take suboptimal pre-cautions to protect their property and externalize those costs onto the state instead. After all, it is easy to think of some cases where owners can protect their property rights more cost-effectively than can the state, and of other cases where a combination of private and state provision of enforcement is optimal. For instance, in many cases, mandatory registration requirements provide a far cheaper and more effective means of protecting many kinds of property rights than any action the state may take alone.