AltInst: Put and Call Liability Rules

From: Robin Hanson <>
Date: Wed May 20 1998 - 13:50:54 PDT

          Forthcoming in the Valparaiso University Law Review,
          Vol. 32, No. 3, Summer 1998.

            Yale Law School and University of Illinois College of
            Law (Visiting)

          CONTACT: Prof. Ian Ayres
          POSTAL: University of Illinois, College of Law, 504
                    East Pennsylvania Avenue, Champaign, IL 61820
          PHONE: (217) 333-1046
          FAX: (217) 244-1478

     Contact Valparaiso University, School of Law, Law Review,
     Wesemann Hall, Valparaiso, IN 46383-6493.
     Phone: (219) 465-7805. Fax: (219) 465-7880.

     In the Calabresi and Melamed framework, liability rules are
     analogous to "call" options in that a potential taker is
     given the choice of taking and paying court determined
     damages. But it is impossible to extend the 4 rule framework
     to include 2 additional "put option" (or "forced purchase")
     rules. A "put option" rule gives the initial entitlement
     holder the choice of retaining the entitlement or the choice
     of being paid to cede the entitlement. Previous analysts of
     the classic Boomer and Spur opinions have focused on who pays
     whom but have often ignored the equally important question of
     who decides whether a payment will be made. The dual thesis
     of this of this article is that put options are a traditional
     part of the common law and that they should remain so.

     Contrary to accepted wisdom, the common law does use "put
     options" -- the right to force a non-consensual purchase --
     as a mechanism for protecting entitlements. 1) If Calabresi
     steals Melamed's watch, Melamed has the option of suing to
     recover the watch (replevin) or suing to receive the watch's
     value (trover). 2) If Calabresi is a holdover tenant in
     Melamed's apartment, Melamed has the option of suing to
     enjoin Calabresi's continuing trespass or (at least in some
     jurisdictions) suing to force Calabresi to rent for up to an
     entire additional year. 3) If Calabresi builds an
     encroaching wall on Melamed's land, Melamed has the option of
     suing to force Calabresi to remove the wall or suing to force
     Calabresi to permanently buy the encroached land. In each of
     these examples, after Calabresi takes Melamed's entitlement,
     the common law gives Melamed a put option -- the option to
     choose court-determined damages (for permanently ceding the
     entitlement to the defendant) or injunctive relief (to
     require the entitlement). Surprisingly, however, the victims
     of nuisance are not routinely given a similar put option. If
     Calabresi pollutes Melamed's land, Melamed is not given an
     analogous put option. Indeed, the famed Boomer decision gives
     this choice to the polluter instead of the adjoining
     residents. This article suggests that put options at times
     should be used to protect property in the nuisance context as

     JEL Classification: Q20, Q30

Robin Hanson
RWJF Health Policy Scholar, Sch. of Public Health 510-643-1884
140 Warren Hall, UC Berkeley, CA 94720-7360 FAX: 510-643-8614

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Received on Wed May 20 14:09:20 1998

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