Dividing possessory rights

Abstract

Introduction Property owners have a right to exclude others from their property, to use their property for various purposes, and to transfer their property by sale or gift. In addition, owners may divide their property in various ways, including by space, time, or function (Ellickson 1993: 1371–75). However, with a few notable exceptions (see, for example, Shavell 2004: 27–32; Stake 2010), there is little economic analysis of how owners divide their possessory rights. The issue of dividing possessory rights has emerged in several recent controversies and debates. For example, one factor in the mortgage crisis was the use of complex financial instruments such as mortgage-backed securities and collateralized-debt obligations. These financial instruments not only permit the separation of a possessory right from a security interest but also enable parties to carve up a security interest numerous times among multiple owners. The complexity of such instruments, and the difficulty of modifying or combining them, may have contributed to the financial crisis (Dana 2010; Judge 2012; Note 2012; Schwarcz 2012). Likewise, scholars have focused on the costs of dividing possessory rights in several recent debates in property law. In analyzing the numerus clausus principle, Merrill and Smith (2000) and Hansmann and Kraak-man (2002) discuss why property law, unlike contract, restricts customizability and authorizes only a limited number of forms. In investigating the tragedy of the anticommons, Heller (1998) emphasizes that, if property becomes excessively fragmented, transaction costs may prevent an efficient assembly of rights. Other scholars are skeptical of arguments for restricting division based on simplifying transactions or preventing fragmentation. They argue that restrictions on dividing may prohibit valuable divisions of property, without a clear economic justification. This chapter analyzes the socially optimal division of property rights, investigates why owners may choose to divide or not to divide their property, and examines the extent to which the private incentive to divide property converges with the optimal level of division.