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Coming to the Nuisance: An Economic Analysis from an Incomplete Contracts Perspective

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  • Rohan Pitchford

Abstract

We construct a model in which an investment opportunity arises for a first mover before it knows the identity of a second mover and in which joint location results in a negative externality. Contracts are inherently incomplete since the first mover cannot bargain over its ex ante investment decision with the anonymous second mover. Given this departure from the setting of the Coase theorem, the allocation of property rights over the externality has real effects on social welfare. We investigate the relative efficiency of property rights regimes used in practice: injunctions, damages, the ruling in the Spur Industries case, etc. The first best can be obtained by allocating property rights (in particular the right to sue for damages) to the second mover. Allocating property rights to the first mover, as a "coming to the nuisance" rule entails, leads to overinvestment. In contrast to conventional wisdom, this inefficiency persists even if a monopoly landowner controls all the land on which the parties may locate. Copyright 2003, Oxford University Press.

Suggested Citation

  • Rohan Pitchford, 2003. "Coming to the Nuisance: An Economic Analysis from an Incomplete Contracts Perspective," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(2), pages 491-516, October.
    • Handle: RePEc:oup:jleorg:v:19:y:2003:i:2:p:491-516
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    Cited by:

    1. Alfred Entires & Bianca Rundshagen, 2008. "A note on Coasean dynamics," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 9(1), pages 57-66, March.
    2. Bouwe R. Dijkstra, 2022. "Payments from Households to Distant Polluting Firms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(3), pages 681-715, July.
    3. Gans, Joshua S., 2015. "Remix rights and negotiations over the use of copy-protected works," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 76-83.
    4. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators- A long-term property rights perspective," Working Papers 17317, Bruegel.
    5. Robert Innes & George Frisvold, 2009. "The Economics of Endangered Species," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 485-512, September.
    6. Alessandro Marchesiani & Ed Nosal, 2017. "Private takings," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(3), pages 639-657, June.
    7. Lawrence W C Lai & Connie W Y Hung, 2008. "The Inner Logic of the Coase Theorem and a Coasian Planning Research Agenda," Environment and Planning B, , vol. 35(2), pages 207-226, April.
    8. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators- A long-term property rights perspective," Working Papers 17317, Bruegel.
    9. Liu, Xingyi, 2016. "Vertical integration and innovation," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 88-120.
    10. Alfred Entires & Bianca Rundshagen, 2008. "A note on Coasean dynamics," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 9(1), pages 57-66, March.
    11. Petropoulos, Georgios & Willems, Bert, 2020. "Long-term transmission rights and dynamic efficiency," Energy Economics, Elsevier, vol. 88(C).
    12. Alex Anas & Richard Arnott, 2004. "Moving costs, security of tenure and eviction," Urban/Regional 0408005, University Library of Munich, Germany.
    13. Pitchford, Rohan & Snyder, Christopher M., 2007. "The identity of the generator in the problem of social cost," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 49-67, July.

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