Document Type


Publication Date



Ronald Coase's essay on "The Problem of Social Cost" introduced the world to transaction costs, and the introduction laid the foundation for an ongoing cottage industry in law and economics. And of all the law-and-economics scholarship built on Coase's insights, perhaps the most widely known and influential contribution has been Calabresi and Melamed's discussion of what they called "property rules" and "liability rules."' Those rules and the methodology behind them are our subjects here. We have a number of objectives, the most basic of which is to provide a much needed primer for those students, scholars, and lawyers who are interested but not particularly fluent in the economic analysis of law. Like Coase before them, Calabresi and Melamed figure regularly in the work of the legal academy, but-again like Coase before them-their ideas are not understood as well as they should be, notwithstanding an excellent explanation by Professor Polinsky published some fifteen years ago. Since Polinsky's contributions have been all too routinely ignored, we shall restate several of his central points emphatically. But we also take issue with parts of Polinsky's analysis, and we aim, in any event, to extend his account, and the literature on property rules and liability rules generally, into previously undiscovered territory. In Parts I and II we set out first the background and next the conventional understanding of the "four rules" that figure in the work of Calabresi and Melamed. Then, in Part II, the centerpiece of our discussion, we shift from description to critique and from the familiar to the novel. We question some of the typical thinking about transaction costs, and about "objective" versus "subjective" accounts of reality (as in objective versus subjective damages). We consider the irony in the standard analysis of "extortion" and the paradox of Calabresi and Melamed's so-called rule four of reverse damages. We present a way out of the paradox-namely reverse-reverse damages, or what we prefer to call "the double reverse twist"-and in the course of doing so introduce a "best-chooser" principle that adds a new element to the conventional methodology. We then use the best-chooser principle to show that much that seems strange in our account is in fact familiar, provided one thinks about legal institutions in a sufficiently systematic way. Throughout, we mean to be both constructive and critical, trying to enhance a useful method of legal analysis but at the same time questioning whether the method, rightly understood, entices its practitioners into a game not worth the candle. So there is a tension in our account. It is addressed in the Conclusion.