Chapter

Puts as Well as Calls

Ian Ayres

in Optional Law

Published by University of Chicago Press

Published in print June 2005 | ISBN: 9780226033464
Published online February 2013 | e-ISBN: 9780226033488 | DOI: http://dx.doi.org/10.7208/chicago/9780226033488.003.0002
Puts as Well as Calls

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Guido Calabresi and Douglas Melamed began a scholarly revolution by showing that legal entitlements have two readily distinguishable types of protection: property rules and liability rules. These two archetypal forms protect an entitlement holder's interest in markedly different ways—via deterrence and compensation. Property rules protect entitlements by trying to deter others from taking. Liability rules protect entitlements not by deterring, but by trying to compensate the victims of nonconsensual takings. Understanding liability rules as a distinct category of entitlement allowed Calabresi and Melamed to see that there was a missing category in the ways courts resolved nuisance disputes. This chapter discusses put options and call options. Call options when exercised give rise to “forced sales,” whereas put options give rise to “forced purchases.” The chapter first looks at the normative case for puts and then describes their descriptive prevalence. It also analyzes the permanent-nuisance doctrine, the numerosity problem, and the costs of determining property rights.

Keywords: put options; call options; legal entitlements; permanent-nuisance doctrine; numerosity problem; property rules; liability rules; property rights; deterrence; compensation

Chapter.  11688 words. 

Subjects: Econometrics and Mathematical Economics

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