When Does the Rule of Liability Matter?

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Abstract
The active interface between law and economics has been limited largely to antitrust and regulation, but recent work, primarily in economics, has revealed a much wider area of common interest. The law, reasoning that crops stand in the way of a neighbor's cattle, can leave the farmer to bear the cost of crop damage; alternatively, reasoning that cattle stray errantly across farm fields, the law can assign liability for crop damages to ranchers. The question of long-run considerations has been raised because it would seem that different liability rules would alter the profitability of remaining inside or outside each industry. Once significant transacting or negotiating cost is admitted into the analysis, the choice of liability rule will have effects on resource allocation, and it no longer follows that wealth distribution is the main or even an important consideration in choosing the liability rule.

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