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Optional LawThe Structure of Legal Entitlements$
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Ian Ayres

Print publication date: 2005

Print ISBN-13: 9780226033464

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226033488.001.0001

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Higher-Order Liability Rules

Higher-Order Liability Rules

(p.73) Chapter Five Higher-Order Liability Rules
Optional Law

Ian Ayres

University of Chicago Press

This chapter analyzes higher-order liability rules that allow a series of reciprocal takings by the litigants. It shows that second-order liability rules (sometimes also referred to as “unconstrained dual-chooser” rules) can harness information of both litigants in more refined ways than either the single or dual-chooser rules. Indeed, if the takings are costlessly implemented, a sequence of reciprocal takings can mimic an auction that produces first-best allocative efficiency—even in the presence of asymmetric information. The chapter illustrates how courts can optimally tailor second- and higher-order damages, explains how one can view liability rules with reciprocal-takings options as forming a class of “internal” auctions, discusses the relative efficiency of second- and higher-order liability rules, and describes how to apply the “dispositive-takings principle” to optimally select damages. Finally, it provides an application of second-order rules to the problem of the efficient dispositive-takings principle.

Keywords:   higher-order liability rules, reciprocal takings, second-order liability rules, allocative efficiency, internal auctions, dispositive-takings principle, damages

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