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a convenient security for loans, often for loans that have little to do with real estate. Think of a chip manufacturer giving a mortgage in its land and factory, or a publishing house mortgaging its headquarters. Because land is valuable, long-lasting, and stationary, it is easy to document and to lend against—two considerations that are tightly connected. Indeed in emerging economies there is a school of thought that giving informal occupiers formal title to land, which they can then use as collateral on impersonal markets, is the way to unlock the economic potential of land and the enterprises that land-based financing could foster.12
• Further Reading
Douglas Baird & Th omas Jackson, Information, Uncertainty, and the Transfer of Property, 13 J. Legal Stud. 299 (1984) (arguing that information costs are critical in understanding property transfer and the title security system).
Quintin Johnstone, Land Transfers: Process and Processors, 22 Val. U. L. Rev. 493 (1988) (providing a good summary of real estate transfer issues).
Saul Levmore, Variety and Uniformity in the Treatment of the Good-Faith Purchaser, 16 J. Legal Stud. 43 (1987) (surveying different treatments of good faith purchasers in different legal systems).
Andro Linklater, Measuring America (2002) (providing history of the rectangular survey system).
Carol M. Rose, Crystals and Mud in Property Law, 40 Stan. L. Rev. 577 (1988) (developing thesis that recordation and mortgage law cycle between ex ante rules and ex post standards).
Robert H. Skilton, Developments in Mortgage Law and Practice, 17 Temp. U. L.Q. 315 (1943) (arguing that complexities in mortgage law largely stem from legislative intervention during economic crises).
12. Hernando de Soto, The Mystery of Capital (2000).
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• eight
Neighbors and Neighborhood Effects
property solves a great many problems about the assignment of responsibility over resources and creates incentives for the management of resources that generally assure good custodial practices. Owners of houses have incentives to make sure that the roof does not leak and the plumbing functions properly. Owners of businesses have incentives to assure that shops are clean, safe, and attractive to customers. But the private-property strategy, which entails chopping up the world into small units of resources, each governed by its own owner-manager, also creates problems. The little boxes of owner-sovereignty can create bottlenecks or barriers to access for neighbors, which prevent property from being used to its highest potential. And owner-sovereigns do many things on their property that will have indirect effects on neighbors. Economists call these neighborhood effects “spillovers” or “externalities.” As discussed in Chapter 3, externalities are the effects of actions taken by one property owner that impose involuntary benefits or costs on others. The qualifier “involuntary” is important: If an action by one property owner has the consent of another property owner, then the action should not be considered an externality. Our focus in this chapter is on how the law regulates these neighborhood effects or externalities, which are in a real sense created by the exclusionary strategy of property.
Neighborhood effects can be either positive or negative. Lawn care provides a simple illustration. If I am highly conscientious about tending to my lawn—keeping it neatly cut, free of weeds, and watering it to maintain a nice shade of green—then I enjoy certain
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benefits, whether it be pleasure at looking at my lawn, pride in seeing the effects of my labors, or an increase in the market value of my home as a result of “curb appeal.” But these efforts also produce positive spillover effects for my neighbors. They too will obtain some pleasure from looking at my lawn, and the market value of their homes may increase (slightly) because they are situated near someone with a fine-looking lawn. These are “free goods” to them that I have provided without any explicit payment for my efforts.
Conversely, if I am not conscientious about tending to my lawn—if I let it go to seed, let the crab grass proliferate, and so forth—then this will produce negative spillover effects for the neighbors. They will incur some displeasure from viewing my unsightly lawn, the market value of homes in the neighborhood may decline (slightly), and there is even some evidence that unkept or poorly maintained property may encourage other types of antisocial behavior in the neighborhood (this is the “broken windows” thesis—that poorly maintained property can cause an increase in criminal activity in a neighborhood1). These are also free—but unwanted—“bads” created by my lack of effort.
In this chapter we explore various strategies for regulating impediments to access by neighbors and neighborhood spillovers. We will consider strategies based on tort liability, modification of property rights, contracts running with the land, and public regulation. These strategies are both substitutes and complements to each other. The question in each case is which strategy or combination of strategies makes the most sense. All things being equal, we want to encourage positive externalities and discourage negative externalities. But of course, all things are never equal. Legal mechanisms are costly, both in terms of the costs of the mechanisms
1.James Q. Wilson & George L. Kelling, Broken Windows: The Police and Neighborhood Safety, Atlantic Monthly, Mar. 1982, at 29, 31–32; see also Hope Corman & Naci Mocan, Carrots, Sticks, and Broken Windows, 48 J.L. & Econ. 235 (2005); but see Bernard E. Harcourt, Illusion of Order: The False Promise of Broken Windows Policing (2001).