| Abstract: | This article analyzes alternative rules for settling conflictsbetween right owner and a bona fide purchaser. The optimal rule,so it is argued, is the one which maximizes the expected valueof the ownership right, given the risk of right violation. Inorder to maximize this value, one must seek to both mitigatethe risk of right violation and augment a potential buyer'swillingness to pay for the right. The analysis specifies therelevant parameters that define which rule is optimal in givencircumstances, and proves that there are cases in which thevalue of the ownership right is maximized if the owner's rightis only partially protected against innocent third parties.Two prevailing notions are challenged: first, that the "market-overt"rule necessarily induces buyers to invest fewer resources inprepurchase precautions, and second, that a buyer's willingnessto pay is unaffected by the choice of the legal rule. |
