The Dichotomy between Property Rules and Liability Rules: Experiences from German Law

Abstract

Calabresi and Melamed delivered a powerful theory to explain under what conditions it is economically efficient to transfer a property right by voluntary and alternatively by involuntary transactions. In the first instance, the property right should be protected by a property rule or an injunction as well as by criminal law sanctions in order to prevent involuntary transactions altogether. In the second instance, it should be protected only by a liability rule that provides compensation for involuntary transactions. Their theory is normative in the sense that they defend involuntary transactions under one set of conditions and voluntary transactions under another. However, their analysis is also analytical insofar as it predicts an evolutionary pressure on legal norms to encourage voluntary or involuntary transactions if the conditions, which they identified, are met. This article describes two diametrically opposed legal changes in Germany. In nuisance law, the development was from voluntary to involuntary transactions, while in privacy law it was from involuntary to voluntary transactions. We try to make it clear that these developments were triggered by the underlying causes that Calabresi and Melamed identified in their seminal paper on property rules vs. liability rules.